Pricing for the Open Banking Economy

 Today, banks have a nod of approval on integration of third party applications and this has paved the way for them to expand their product portfolios and embark on a journey of change. Open banking has enabled banks to go beyond conventional banking and explore new avenues, leading to unprecedented innovation. 

 

Fact is, ever since banking came into existence, customer data has remained with one entity – banks themselves. However, with the changing dynamics and open banking becoming the focus, customers now have control over their own data. This has enabled third parties such as non-banking service providers to be part of the ecosystem to offer personalized, intuitive, and cost-effective offerings that solve customer lifecycle needs. The adoption of banking-as-a-service is creating limitless possibilities and a plethora of customized offerings for the bank’s customers.  

 

Understandably, interest in open banking models is high. In 2020, 29% of CXOs were of the opinion that open banking was their choice of innovation strategy for the future. And 45% believed that it was a part of their larger digital ecosystem vision. Truth is, as open banking picks up pace, banks will have to put their best foot forward to ensure the best pricing strategies for this new economy. 

 

A change in banking,  

a change in pricing models. 

 

It’s time for banks to say goodbye to older pricing models and move into a new era of change, as open banking system demands newer pricing models. To make sure the new pricing strategy offers the best return on investment and value for third parties, dynamic pricing is the way to approach it –because it offers an open canvas for learning, adapting and evolving prices. In a nutshell, value-based pricing model is best suited for the open banking economy because it is based on the providers’ understanding of the value delivered by the user and their capacity to pay. 

 

Pricing strategy for multiple API user segments  

 

An optimal way for banks to approach the pricing strategy is to begin by segmenting API users based on their individual characteristics, needs and the value generated from the API, while simultaneously keeping a tab on the costs. Banks should also consider the larger market context, as a completely different approach in an already established scenario may perplex third-party providers, resulting in a drastic reduction in adoption.  

 

The pricing models have to be designed to deliver business value for each segment of customers as a different value driver might be the key, and the solution should be in having a suitable pricing model. Pricing models can be segregated into four broad categories to suit different segments. 

 

First segment: 

The first segment includes independent developers, start-ups and fintechs looking for data and business functionalities that will help create products of their own. This segment ideally wants to build and refine the product constantly which requires flexibility. Once the product is finalized, only then is the transaction cost passed down to the consumer. In this scenario, the pricing strategy has to be devised in such a manner that it is aligned right from the beginning of the product development journey but can enable payments against usage, only upon acquisition of customers. A quintessential example of the same would be the case where an e-commerce platform successfully created a dual pricing model for its APIs. The first model being a starter pack which is free of cost for users and the second one being an advanced option for business purposes including a full payment suite with options depending on the transaction value. 

 

Second segment: 

The second segment mainly includes payment aggregators. These players are often involved in the product distribution strategy for the API provider by helping sign up more payment partners and merchants. They can widen the reach of the APIs to other businesses that are ready to pay for the integration. They may also add value-added services to bring in more third parties. In this case, revenue sharing models would benefit both the aggregator and the provider. 

 

Third segment: 

A segment of companies or organizations that are primarily looking to use APIs with the single objective of enhancing operational efficiency resulting in the advantage of a reduction in cost and risks primarily associated with diverse transactions, validations, and reconciliations. This includes organizations dealing with a high volume of business who have no qualms about paying for the usage right from the start. For such a segment, it is of utmost importance to ensure that a volume-based pricing strategy is put into place. 

 

Fourth segment: 

Small scale businesses, utility providers and retailers that use APIs to improve access to their products and services. The pricing strategy for each of them needs to be based on the type of business, requirement and expectations, as they don’t generate very high business volumes. 

 

Pricing based on API objectives: 

 

An API works well if the pricing is complemented with the overall objective of its creation. Whether it is merchant payment API or something else, the pricing has to be aligned with the simple objective of creating value by enhancing the market share as well as a significant increase in the transaction volume. And not just focussing on increasing revenue.  

 

Technology driven pricing: 

Pricing for open banking should have a strong focus on agility and scalability in equal measure as these two factors drive the local and global markets. Other important aspects include dynamic pricing models based on data derived from the APIs and the ability to integrate easily with multiple third-party systems when using the APIs. 

 

In the wake of the recent events that have changed the way business is done, open banking seems to be the future. Now is the time for banks to embrace and explore newer forms of revenue models. Banks who wish to set foot into this new era must be aware that their success is directly connected with third-party API consumers. Pricing models that ensure mutual benefit and multilateral value is the only way to successfully navigate the open banking economy.