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APIs & Finance: Threat or Opportunity?

Tien Tzuo
CEO, Zuora

Welcome! This week we’re discussing APIs and the financial sector with Michael Mansard, Principal Director of Subscription Strategy at Zuora and EMEA Chair of the Subscribed Institute, who has written extensively about this topic.

Welcome, Michael! As a member of our Subscribed Strategy Group, you’re among the first to see how various industries are adopting recurring revenue models.

That’s right. SSG is constantly talking to executives and working with partners like McKinsey and BCG and our own data science team to see where the Subscription Economy is going. We’re trying to chart the future!

What’s the industry you are paying more attention to these days?

Well, there’s a very traditional industry that’s currently in the midst of a huge amount of digital disruption: finance. In fact, we recently published a white paper with INSEAD about how APIs are transforming the financial services industry.

APIs plus financial services, that’s fascinating. But help me set the scene first. When I think of financial services, I think of banks, who have been traditionally seen as impenetrable to new business ideas.

Well, that’s true. Banks were untouchable for decades. It was very difficult to build a viable competition against these companies, many of which date from the 18th or 19th century. HSBC for example, dates from the Opium Wars. And then, during the first wave of mainframe computers, they had the resources to buy the most advanced information systems in the world. New technology only cemented their leadership. Also, of course, they were backed by government regulations.

There’s a reason why Hewlett & Packard invented an audio oscillator in their Palo Alto garage in 1939 instead of a new bank.

Correct. But over the last decade, that competitive moat has largely eroded, for all sorts of reasons. There’s the Internet, of course. There are repercussions from 2008 – growing regulations, stricter fines, flat interest rates. There are digital disruptors and customers who want better experiences at lower costs. To be fair, a lot of those customers are reacting to lazy, defensive practices like point fees and surcharges.

Then came the big game-changer – all sorts of countries enacted open API legislation. API stands for application programming interface. It’s a piece of intermediary software that allows two applications to talk to each other. APIs create a common language — an Esperanto of the Internet.

We all know why APIs are important – they’re what made Twilio such a successful company, for example. But how did that legislation change the industry?

Well, basically, the governments forced the banks to open up their black boxes by standardizing via APIs, thus allowing their customers and other companies access to all their basic functions: payments, savings, financial advice, mortgages, insurance models, etc. It’s one of the reasons you are seeing so many disruptive startups in this area.

Ah, that makes sense now. So are the banks screwed? Are APIs the ladders the barbarians are going to use to leap over their castle walls? You could easily imagine a scenario where the banks get stuck passively handling all the regulatory issues while everyone else builds hot new fintech products on top of their basic functions. The banks are down in the basement, shoveling coal for the cool kids.

Ha! Maybe! But maybe instead, APIs are a gold mine. They are the building blocks of entirely new business models and revenue streams. Just take a look at Amazon. Jeff Bezos famously wrote an “API mandate” that’s arguably responsible for a lot of his company’s success today. The basic idea is that everyone has to build with the same set of lego blocks, so we can jump on new ideas quickly and build stuff that plays well with others. APIs create the infrastructure to help companies react quickly and respond to opportunities.

But most importantly (and Jeff Bezos realized this), the APIs themselves aren’t the answer. They’re just a means to an end. The secret is to embrace your customer. When you use APIs to listen and understand your customer more effectively, then you’re suddenly in a whole new world of opportunity.

A key part of that famous API mandate was that all new service interfaces had to be externalizable. The teams had to plan their interfaces so that they could be used by developers in the outside world. So Bezos clearly thought access was more important than closed ownership in terms of system design, and he was clearly right. It’s also probably no coincidence that the founder of Twilio is an ex-Amazon developer!

Exactly. Look, financial service firms around the world are all looking to do the same three things: increase their growth opportunities, improve their client experience and enhance their operational efficiency. A lot of banks like the efficiency aspects of digitization, but it’s a huge mistake to think of APIs as just a way of letting people access their checking accounts over their cell phones so you can close more branches.

Instead, let’s look at growth and experience. APIs enable growth by letting banks virtualize their services, so that they’re suddenly capable of being in all kinds of new places. Think about it. What happens when you get a new idea for a business? You don’t think “Oh gosh, I better head down to the bank and get all my paperwork together.” You just head straight for the opportunity, and APIs help banks meet you at that opportunity.

Let’s say you’ve got a great idea for an e-commerce store, but you need to capitalize lots of inventory. Well, because of APIs, Shopify works with banks to help you manage that. Lemonade works with banks to help you get insurance. Braid works with banks to help you pool money. By adding fintech to their suite of services, SaaS companies can increase revenue per customer by 2-5x as well as open up all kinds of new markets.

But isn’t that just coal shoveling for the banks? Aren’t they just relegated as the back-ends for all the hip Robinhoods of the world?

Look, it’s going to happen. This is the new landscape. So the question is: how are you going to react? Wouldn’t you want to situate yourself in the midst of all this growth? I think even more importantly, these new capabilities and partnerships are also forcing banks to completely re-imagine themselves as service providers. What kinds of questions should banks be asking us today? Maybe instead of “Can I sell you a mortgage?” It should be: “What do you need at each stage in your life, and how can I help make them happen?”

Right now you might see that kind of message in a poster or a commercial, but you don’t really see it in practice. I certainly don’t sense that kind of vibe coming from my monthly mortgage statement.

That’s because they don’t know anything about you, really. They’re not very customer-oriented. They’re not driving any incremental value. And today companies don’t succeed by sending you a questionnaire to find out your wants and needs, they succeed by responding directly to your wants and needs because they’re seeing them in their own data. If data and APIs are the infrastructure, then subscription models are the business model. They lock in that virtuous feedback loop. Otherwise, you’re using APIs as just an additional digital channel; simply another way to access an underlying financial product whose core value keeps eroding over time. If you really want to succeed with APIs, you need to think like Amazon and use them as a way to embrace your customer.

I’m glad you raised the business model part, because I think it would be a huge mistake for banks to act like media companies did twenty years ago, and think that the Internet just means “open-sourced and ad-based.” That they need to dissolve their businesses because that’s what consumers are demanding.

It’s a new agreement. I don’t go to a bank anymore, the bank comes to me. It assesses my situation then approaches me with a range of personalized services that I can dial up or down as I see fit. And it’s worth paying for these services because they get better as I use them more.

There’s obviously tons more to talk about. We’ll get into more service ideas next time. Thanks, Michael!

Thanks Tien!

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