I had the good fortune to be on the fintech Insider’s Live Podcast at Xerocon this week (Xero’s annual accounting conference) to share about the launch of the Starling Bank and Xero integration. The partnership will give small business owners a head-start through the digitalisation of their finances, saving time on manual entry and removing the risk of lost transactional data. I really enjoyed the podcast, as always, but was left with a nagging feeling afterwards that there were a few concepts I touched on at a high level that could really use further explanation, so figured I would share here as I’m on a roll with my blogging this week:
The API economy doesn’t need to be regulated in order to be successful, and
Compliance isn’t innovation.
So I want to expand on both of those concepts briefly. My first point is that APIs have fundamentally been changing the way that software has been built and brought to market in consumer tech, and they are going to do the same thing in banking and fintech – whether or not they are regulated – because of the massive benefits they bring to the table.
As Anne Boden, Starling’s chief executive, likes to say: the API economy is far more important and relevant than PSD2 and Open Banking. APIs enable connectivity, which results in products being built better, faster, and at lower cost. People now expect their banks to offer the same type of connected, intuitive, real-time experience that they have from other apps and services. As a result, the true API economy does not need regulation for its survival or existence. The API revolution is happening in every other industry – it does not need to be legislated to transform banking.
Anne made this point recently in a keynote address, citing Stripe, which has transformed acquiring and Twilio, which is doing the same for messaging. The big tech companies, meanwhile, have also made their platforms accessible as components and as an API. Amazon Web Services (AWS) is now the way to procure data centre services – gone are the days of hammering out a contract with Electronic Data Systems (EDS) for a data centre contract. It’s happening at every level - if you travel by Uber, it’s because you choose to make your own location data open through your phone.
Banking is ripe for the unbundling revolution
The underlying theme of this kind of disruption is the unbundling of supply and service. Banking has come late to the unbundling revolution. But now, the sector is ripe for it - for unbundling, or disaggregation - and ripe for its own Software-as-a-Service transformation that will allow customers to pick and choose and pay for applications as they use them, rather than buy them outright. The beauty of it is that this simultaneously enables greater choice for customers and means that better services are built (and usually with lower fees, given the lower tech cost basis).
The benefit of regulation, however, is that it accelerates the timeline and forces incumbents to innovate and stay competitive when they wouldn’t have otherwise - at least not until a much later date after seeing the effect of new, disruptive startups successfully implementing the tech.
To my second point, “Compliance isn’t innovation”, I’ll explain with a story: back at my first ever Xerocon in 2015, I recall the Xero UK Managing Director Gary Turner commenting on the launch of Xero UK Payroll and how it was bringing innovation into this space for the first time in years. Some of Xero’s competitors were infuriated by the comment and hit back, saying they had been innovating by keeping up with regulation like RTI (real-time information), and Gary was like, “No, complying with regulation is not innovation. It’s a good start, but it’s not innovation.”
Going the extra mile at Starling
It’s so true. I love how the UK regulator implements legislation such as RTI and Open Banking because it gives the entire industry a high bar for a minimum quality level. I love too that the regulator is urging companies to think about the ways in which technology is changing their business and delivery of it to customers, and – in the case of Open Banking – forcing them to start using that same tech to disrupt their own businesses, perhaps before they even wanted to start thinking about it. That said, the regulation is the minimum. At Starling, our APIs go way beyond the Open Banking regulation, and have from the start. We aim to manifest every feature via API.
So, in sum, the regulation is a great start and will help incumbents stay competitive in this space, particularly on the global scale compared to international banks that are behind in this area, but it’s not innovation.