The Bank to Developer (B2D) SDK and Business Model

There are several trends converging to make FinTech and Banks being disrupted very sexy news indeed.

  1. Post Financial Crisis Bank Hatred
  2. Shiny Startups Like Square, Stripe and the hard to pin down Bitcoin
  3. Interest from GAFA (Google, Apple, Facebook, Amazon)
  4. Interest from VCs

This trend is typified by certain Tech (crunchy) press lately about Bitcoin, Transferwise and Banking Disruption:

I sense there is an assumption that because the logic of what a bank does is actually frighteningly simple, it would be really easy to disrupt them if someone could just get the jigsaw puzzle right.

An Alternative Perspective

I disagree with the mainstream narrative, and at the risk of being contrarian…  I propose that a new business model will emerge and has already started to do so.   Transferwise, Azimo and others already rely heavily on banking infrastructure.  Whilst the hype may suggest they are changing the face of  banking, the short term reality is that they are just adding cost (or profiting less), and perhaps a nice UI to the equation for the end user.  Banks have caught on to this trend and… I feel a bold prediction coming on:

In the next 18 months banks will actively participate in inviting disruption into the market, and profit from it because they see the opportunity.

Finance is Difficult to Disrupt

The CEO of Moni Technologies said something very interesting at the recent TechStars / Barclays Accelerator launch.  He was surprised just how tough the basic regulation you need to get a money transfer business of the ground is.   Not just the paperwork but the costs  and the sheer amount of over head you take on by keeping up with (for example PCI-DSS).

This is where I think banks can actually help FinTech ‘disruptors’ bring new products and services to market.  Banks are actually good at keeping up with regulation, which is costly and makes innovation very difficult…

Banks Need a Change of Mindset about HOW they Invest in Innovation

 Because Bank 1.0 has a war on two fronts.

  1.  The drive to being ever more secure, stable and robust in core systems
  2. The drive for ever more nimble, agile and beautiful customer experience
 This tension has escalated in recent years with the investment in mobile, digital competing for budget with ageing core systems.
Banks fear a core system failure like RBS had, or fraud events like the Target hack… The business dilemma had two main points

1) Focusing on Core Systems Could Lead to Losing Market Share
If a bank did nothing but invest in quality, stability and security it risks is losing ground to competitors who would bring the shiny new mobile app to market and win market share.

2) Focusing on Innovation Could Lead to Losing Market Share
If a bank did nothing but invest in features, the core systems could become less robust. The cost of failure is immeasurably high with the potential for fines, bad press and lost business.

But I put it to you that trying to do both is Even Worse!
No bank would actively make a choice to lose market share. So they have been fighting a war on both fronts. Push the innovation agenda, and drive towards ever more stable and secure systems. To quote Winston Churchill “It’s like standing in a bucket and trying to lift yourself out by the handle”.

The mandatory and regulatory spend will continue to eat at least ~70% of IT Spend. Roughly ~20% supports client driven change, leaving just 10% for “innovation” which often takes the shape of “me too” app development.

An Historic Lesson on Business Model Change for Survival

At the turn of the millennium, BT were facing a break up from the regulator Ofcomm as the monopoly player in the UK telco sector. What they did was actually smarter than it first appeared, they got out in front of the regulation and split their business into “Wholesale” (AKA Openreach) and “Retail”.

The Wholesale business had to focus investment on what would allow them to serve many “Retailers” including BT Retail, as well as all the other Telcos (Talk Talk, Virgin Media, Sky etc). The benefit of investing in the tools and capability to “unbundle” the local loop was that this protected the scale if the wholesale business.  I’d argue BT got the business model right and survived the transition from “owning the pipes” to “re-selling the pipes” quite well.  Below, is an outline for how Banks might improve on their current situation:

Changing the Business Model 

It will take an incredibly brave executive to be the first to offer “wholesale” services to competitive brands, retailers and start-ups looking to disrupt the traditional business model.  Yet, surely it is better to be well positioned for the future, than a victim of it.  The message is a compelling one to the board.  Adapt or die watch as the RoE continues to erode over the coming decade as it has over the 5 years.

Bank to Developer means:

  • Offering a suite of APIs that are easy to use, self serve and well documented
  • Offering tools to manage APIs, access to accounts, data and billing so that an API user can manage and sell on these services downstream
  • Developing a Tech Architecture that delivers Internal and External API access that the whole company is behind.  No exceptions.

Laser Focused Investment 

It’s 2014, and it’s surprising how often IT departments still re-invent the wheel and suffer from NIH (Not Invented Here) syndrome.  Leveraging tools like Apigee, DevOps and the sheer tidal wive of desire for vendors to sell “platform” tools into corporates is the first step.

Then IT and Business Execs need to use lead bullets not silver bullets.  Kill anything that is not yet in flight, that doesn’t adhere to the new strategy.  You can only make the leap if you’re willing to jump.


Benefits of a B2D (Bank to Developer) business model
If you believe like I do that
  • Small developers will always out innovate large organisations
  • Large organisations are good at “compliance”
  • There is no “SDK” for banking or payments

Then the first bank to get this right is incredibly well placed to take advantage of the huge level of VC, Start up and media interest in FinTech.  To Quote Steve Jobs:

“Innovation is about the people you have, how you’re led and how much you get it

  • dmgerbino

    I totally agree with you, “Finance is difficult to Disrupt.” The B2D is an excellent model for banks and startups to adopt.

  • sytaylor

    Thanks :@dmgerbino:disqus I wonder how many internal projects are being built in readiness for the coming of a B2D model and how much is business as usual?

  • Dave Birch

    Absolutely excellent post. Well said.

  • Nik Adhia

    There are two points right at the end that sum this article up really well – banks are great at the things they’ve basically been doing for years (robustness, security and regulation) and startups are great at doing the things they’ve been doing (iterating, innovation, hacking the system and being nimble). Whilst I agree with you that companies with a nice UI aren’t changing the face of banking, they’re giving banking a new face that’s appealing to the consumer. Like you say, banks aren’t doing too well in the consumer eye. Suddenly, you put a shiny new UI, use the nimble nature of a startup to take leaps into unknown spaces with focused resources and you build on a banking ecosystem, you suddenly have the best of both worlds.

    Question: What happens when all of the banks try to do this (on the lead of one or two that do well from this) – doesn’t this almost create the same war where there are fragmented methods everywhere (despite Paym) and again it ends up confusing the general market?

    Enjoyed the read nonetheless :)

  • sytaylor

    The banking system is already highly fragmented, the cracks are papered over quite well because

    1) Banks are Big
    2) There aren’t many of them
    3) They’re quite fond of meeting up once a year in Dubai to make up arbitrary standards

    Opening APIs will bring oxygen into the space and developer demand will create both opportunity and a significant degree of challenge for banks. Fragmentation will be an issue, but it is already. Standards will emerge, but so long as this pain is hidden from the consumer and indeed most developers it shouldn’t be a huge problem.

  • Adrian Hope-Bailie

    Assuming a bank follows this model the APIs they expose will only be useful for a subset of the functionality that consumers need from their bank. The most commonly used features require some form of inter-bank integration (customer from bank A pays for product/service at merchant who banks with bank B).

    For this business model to work some industry or region-wide initiative is required to define a common API or standards for interoperability. The PayM initiative in the UK appears to be a step in the right direction in this regard but I suspect this will be a crucial piece of the puzzle for the model to succeed in the US.

    Historically the card associations have provided the consumer to bank (POS/ATM to acquiring bank) and bank to bank networks (esp. outside regional networks). The public internet offers an alternative platform to the private card networks but a solution is required to provide all of the features of the card networks (beyond the infrastructure) on the public internet such as fraud monitoring, management of fraud liability etc.

    My hope is that real-time inter-bank clearing will be the start of a move away from payments initiated at the point-of-service (debit-pull) to consumer payments initiated by the consumer via a trusted channel with their own bank (credit-push) such as their bank’s mobile app.

    Under such a model the B2D business model would thrive. The bank handles inter-bank and regulatory issues and the developer uses the bank’s authentication and transaction APIs to offer customers a whole new world of services.

  • sytaylor

    Thanks for the comment Adrian. I’d like to challenge the premise that APIs are only useful for a subset of consumer functionality. In the very short term, banks could take out a ton of “keeping the lights on” cost by sorting out their own internal systems integration with APIs.

    Once that bedrock is in place then I can see small companies like Moni technologies, Transferwise or Azimo actually using the APIs a bank exposes on the consumer level. At enterprise level, organisations like SAP or Salesforce would be a great home for FX capability, FPS, SWIFT or CHAPS capability.

    Bank’s APIs could flow upstream or downstream. Up into services like SAP, or down into consumer / commercial Apps.

  • Adrian Hope-Bailie

    My point is that for most people having a bank account is a convenient way to store money that they can spend when they shop. i.e. I swipe my card a lot more often that I pay bills, take out loans etc. All the API’s in the world have limited value to me as the customer if the most common transaction I perform against my account is to pay a merchant for goods or services.

    The payment model toady is predominantly debit-pull and driven by the use of a payment card as the token identifying my account. The merchant’s acquiring bank attempts to debit my account at my bank in order to pay for the goods/services. My bank is only involved through an inter-bank network (regional or international and in many cases through the card association network) and the interface used to access my bank account is mature and unlikely to change.

    I like your model but for it to really impact consumers/bank account holders the APIs their bank expose need to be useful in this most common transaction scenario. Therefor the model must change to a credit-push. I should instruct my bank to pay the merchant and the merchant is notified in real–time that this has been done.

    If this model changes then the APIs my bank exposes become more meaningful to me as innovators can play in the space that I care most about.

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