Post SNB Conclusions
While each of us may draw own conclusion after SNB events, it is safe to assume that the whole industry has been divided into Pre and Post SNB periods. Prior to the Swiss Franc Black Swan event, brokers were mostly fighting for every single client, and now it is possible to see a much higher priority being placed on the cost reduction and automation of the processes. Also, during the current acquisition of Plus500, technology is a premier interest rather than the client database. This tells us that a new Post SNB era may signify a period of doing things in a better way rather than simply doing more. This article will briefly uncover the Banking API technology and its possible impacts on the retail FX industry.
What is a Banking API?
Although banks tend to posses the largest amount of financial data, they remain one of the most closed institutions in the industry. Having access to the customers’ banking data is quite desirable for many organisations, while for some developers it can be just an inevitable key to success. This is why some FinTech companies that develop the connections to the banks have evolved. The whole idea of the Banking API will not be covered in this post, so if this seems to be a black box for you - check out my previous post on this subject. In simple words, a Banking API lets an organisation access the data from customers’ bank account for the purpose of KYC, credit scoring and more.
How FX can be transformed with a Banking API?
Generally, access to customers’ banking history can be used in many ways to speed up, extend and improve the services of the broker. It is something that has not been used in the FX industry, yet online lenders have been using the technologies for years. Below I will highlight 3 major points that could be improved with the integration of such cutting-edge technologies in your FX Brokerage.
Registration Process
Having short registration forms is a dream of every marketeer. When it comes to the FX industry, it is sometimes possible to see the registration form that contains just a few fields, yet in most of the cases a few fields would just indicate a first step in the client’s registration process. Plus500 seemed to be the broker that managed to achieve the easiest registration process, as the client's’ identity verification was taking place only once the withdrawal request had been submitted. Nevertheless, it seems that such an easy registration may not have been conducted properly and resulted in some harsh consequences for this broker.
How Banking API can help here?
To make things simple, look at the authentication with banking credentials as a “Login with Facebook” option but in the realm of financial organisations. Instead of letting your clients fill out 20+ fields, he would only need to log in using his bank account number and then fill out the data that is beyond the scope of banking credentials, such as trading experience. This way your broker can significantly reduce the amount of steps needed for the conversion.
KYC Expenses & Quality
Many of the retail forex brokers are currently regulated by CySEC and FCA. This means that such brokers are legally obliged to verify client identities before opening an account. I talked with a few brokers while composing this article and found out that on average it takes about 15 minutes to perform KYC and usually brokers employ more than one full-time person for such a job. In over 50% of the cases, a client is required to resubmit the documents or provide the missing ones. Sales force (aka account managers) are quite often also involved in this process. The quality of the submitted documents also plays an important role, as some brokers employ automatic ID check software, which is not always compatible with the documents of poor quality. Such an old fashioned process results in a possibility of human error, which can trigger legal consequences, higher employment costs and increased rate of denied applications.
Would Banking API help here?
It certainly would. Instead of relying on the pure human efforts, a broker may start relying on a superior technology that would not perform KYC, but allow a broker to use the client identification that was already performed by another financial institution; his/her bank. This way a broker can minimize the costs, increase the acceptance rate and most importantly, reduce client KYC process to seconds.
Sales Insights
This is perhaps the most challenging field for the brokers. Some brokers are doing lead scoring, but most of the brokers do not have any scoring system in place. As we may imagine, brokers want to hunt the traders that are looking to deposit a decent sum. Yet a lot of the sales effort is spent on the traders that can deposit the maximum of a few hundred dollars. In general, account managers mostly rely on their feelings and beliefs when it comes to closing the clients rather than some measured data.
Banking API Nails It. I mean it.
When a client uses his banking credentials to speed-up the registration and identification process, a broker also gains insights on the client’s banking activity. In simple words, a broker gets to find out how much money a client has on his account. This way it is possible to segregate the clients based on their depositing capabilities. Smashing, isn’t it? With Banking API a broker can dedicate the best sales force to the potential clients that have the highest depositing capabilities, while small and average clients can be served by not-so-experienced staff or even by the automated solutions.
Wait, is this thing even legal?
The legislation of screen-scraping, the technology that is used for the development of the Banking APIs, is still a subject for a further debate at EU parliament throughout 2015. Nevertheless, so far it seems that EU parliament is up for the usage and implementations of such technologies. When it comes to the legal status for the moment being, it is rather simple. Banking APIs have been used by online lenders in markets as Poland, Czech Republic, Spain, Russia and more for years and it was not an issue with the regulators. However, it is necessary to say that a few banks in Poland were issued a memo that recommended avoidance of screen-scraping technologies. The rule of thumb is, if you are using such technology in the country where your regulator is not located - the chances of having legal issues are close to 0.
Getting Banking API
Generally, there are a few Banking API providers out there. The scope of the providers usually lay in their geographical coverage. However the quality and technology used is also what differentiates one API provider from another. My firm's KontoX Banking API, provides coverage in Poland, Czech Republic, Brazil, Mexico, Russia, Spain and more countries to be captured soon.
Conclusion
Technology has always been the main mean of the progress and now it is certainly the right time to start employing new sophisticated technologies in the retail FX sector. Banking API can be a new future for the FX, as it simplifies registration, speeds up KYC, reduces expenses and provides the sales with the most valuable information. With a correct application of the APIs, a broker may even go beyond this and start developing A-Book / B-Book allocation system without any prior trading history of a client.
