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PCBB Banc Investment Daily March 01, 2016
Banc Investment Daily
March 01, 2016

Happy APIs

Some old geezers out there still get fussy when it comes to millennials. After all, millennials often are more interested in looking at their phone than in keeping eye contact with you. Well, everyone will have to get used to millennials and adapt to them in the workplace because in less than 10Ys they will represent 75% of the workforce.
As you ponder who your next boss might be as you look around the bank, consider that if you want to capture millennials as customers you have to start by getting their attention. These customers seek a rich, diverse experience on the Web at a minimum. That is why some larger banks are recommending regulators allow them to open up their financial software to outside applications and developers.
Two years ago in fact, the UK's HM Treasury even created an Open Banking Working Group to investigate application programming interfaces (APIs). APIs allow one piece of software to talk to another and if banks can open things up they can then work with third party developers to build applications that interact with bank data. Before you go diving under your security blanket, consider that younger customers actively seek out innovative services, so longer term banks have to be in this game.
Bankers could for example, allow customers to compare services between different banks, play games that encourage them to save more money, notify of overdrafts, buy foreign currency, or participate in crowd funding. There is no limit to a developer's imagination, so the sky is the limit perhaps.
Given its position at the forefront of this idea, the HM Treasury should very soon publish a framework for APIs and its European counterpart is following the same path. In fact, the European Commission issued a directive in Oct requiring banks to give third party applications access to their customers' accounts. The customers must, of course, volunteer to open those accounts up and they will have time to think about it because the directive doesn't come into effect until Dec 2017.
So far, US banks seem more reluctant to embrace APIs. One reason for sure is that under GLBA and other regulations, US banks must safeguard customer data. Furthermore, bankers by nature are risk adverse, so expect slow movement domestically.
Fortunately APIs are safer than screen scraping, which is the way some financial data aggregators gather customer information. To screen scrape, these aggregators ask customers for their usernames and passwords as a way to do so--a very porous practice. APIs, on the other hand, don't have access to confidential customer data and only rely on the interaction of different pieces of software and fields allowed by all parties.
One way a US bank could eventually leverage APIs to improve the consumer's experience might be through an app. That app could create a portal that allows the customer to manage in a unique place several accounts with different providers. Yet another app could give tools to compare products from different companies or banks.
On the one hand, this structure may encourage the customer to go elsewhere, but on the other hand it could also bring opportunities. Only time will tell, but the innovative bank of the future may be seen more as a hub for transactions. It may even get a cut from developers just to access the platform. Millennials will no doubt like banks that listen to their needs and anticipate those needs.