Open data is creating value for economies, companies, and individuals across a number of industries. In the financial industry, open banking is the next step in the evolution of how banks share their data, products/services, and functionality, and how they enable consumers to share their financial data, account information, and functionality for access and use by authorized third parties.
Driving innovation in the financial sector
Open Banking is driving banking innovation through partnerships and collaborations with various participants within and outside the financial and banking services industry. It enables the creation of value and flexibility that consumers and businesses crave, by making financial data and account information more available and widely shared than ever before. When securely shared or published openly using open APIs, this data can be used to build useful applications and resources to improve the banking experience, offering interoperability the industry currently lacks. Customers can look for a loan more easily, banks can find customers matched to a new product, and businesses can share data with their accountants. This, in turn, stimulates innovation and drives customer loyalty and retention.
Driving innovation in banking
The rise of fintech startups and the new digital customer mindset have been contributing to a digitalization of the world’s banking systems. In the 2018 Retail Banking Trends and Predictions by The Financial Brand and Kony, 57% of those surveyed placed the use and application of data trend in the top 3 for 2018, compared to 53% in predictions for 2017. The report shows that open banking APIs are becoming essential to facilitating richness and ease of integration with third parties’ services and products.
Historically, banking data – such as details of personal or business bank account transactions – has not been easy to share. Most customers can access and download their bank statements from their providers, but sharing them with any third party in machine-readable formats (that computers can understand) is not as easy. Banks have their product information on a public website, but gaining access to well-structured data for anyone wishing to use this information to create a service is cumbersome, to say the least.
Most organizations today have tens of internal APIs (Application Programming Interfaces), but these APIs often lack standardization, adequate documentation or openness to the public. Open APIs are both public and standardized, making it easier for third-party integrations and customized feature development. Data from Open APIs can be used to improve the usability of online banking platforms. Today’s renewed relevance of APIs is geared towards adapting to new ways of working and customers expectations.
“Open API An application programming interface (API) is a proven technology that can help provide access to open data (such as a list of products that a bank provides) and secure shared access to private data (such as a list of the transactions in an individual’s bank statements). Data accessed via an open API may be closed, shared or open. “
As banks have access to more data, they need to identify the right digital business models that can interpret that data and use it to drive innovation and operational efficiency. Two such models are emerging presently, and they are banking-as-a-marketplace and banking-as-a-platform.
Catering to the needs of digital consumers, banks need to become marketplaces, that can offer customers a range of services from emergency loans to personalized mortgages, from budgeting software and apps to insurances. Moreover, they need to do it all in one place and make it easy for customers to access it on any digital device, anywhere, anytime.
In the banking-as-a-marketplace model, customers can manage their finances and have access to third parties’ financial and non-financial products and services, alongside the bank’s core products such as a current account. In order to make this happen, the bank enters into, and curates, a number of business partnerships with selected and trusted third-party service providers, which agree to offer their services and products throughout the bank’s marketplace as either white-labeled or co-branded services and products.
Peter-Jan Van de Venn, CCO of Dutch digital core banking platform provider Five Degrees believes that the banking-as-a-marketplace model has the potential to deliver an interconnected financial services industry where banks can get closer to their small business customers. His company partnered with Dutch online bank Knab to deliver the first digital-only, paperless onboarding process for SME banking customers in the Netherlands, which enabled them to sign up business customers in minutes, compared to the weeks it took for these enterprises to open an account with a high street bank. Knab also provides third party crowdfunding services to SMEs, which enables them to build a new platform from scratch.
In the banking-as-a-marketplace model, banks continue to provide and develop their core services and create relationships with carefully selected partners that can fill-in the gaps within their product portfolios. There are no openly published APIs, the bank offers the service (and therefore maintains the primary relationship) and there is a high level of curation across what’s offered.
In the banking-as-a-platform model, banks are transitioning from a full-stack technological environment where they have a complete, end-to-end product or service that bypasses existing companies, to having an open set of APIs that any third-party can use to build products and services. For example, the bank could integrate with a service provided by an upcoming FIntech startup that provides real-time financial information, which helps consumers make better-informed and more efficient decisions about spending, saving, and borrowing.
This model offers the advantage of providing customers with a greater variety of products and services and a more comprehensive set of capabilities. In the retail industry especially, customers have embraced these platform-based businesses for reduced friction, lower prices, and better service, along with the convenience of using mobile devices as the primary point of contact. This has created the expectation that other products and services in other industries behave the same way.
An open banking architecture is based on the following components:
Scalable open API platform
Centralised API Manager to ensure the connected services operate together seamlessly
Robust Business Process Management (BPM) workflows, both internal to the bank and reaching out to the customer
Easy-to-integrate front ends and ‘plug and play’ connections
Fidor, a German digital-only bank, uses the Fidor Operating System (fOS), an open digital banking platform built to integrate legacy and modern fintech systems via a managed API gateway. fOS handles customers’ banking needs through its fully integrated front end layer, API layer, banking modules and core functions.
In the banking-as-a-platform model, the bank opens its API’s up to anyone who is interested, including other Fintechs, potential competitors and third-party developers, so that they can use the bank’s data to build their own products to be accessed via a platform.
“With the digital transformation trend in the financial industry, financial institutions across the globe need to continuously deepen their digital strategies and transformation initiatives to achieve platform-based strategic transformation.”
- Ma Yue, Vice President of Huawei Enterprise BG, President of EBG Global Sales at the Global Financial Services Industry (FSI) Summit 2018
Regulations and legislation
The current legislative and regulatory reforms in Europe and the United States are acting both as a catalyst for change and an accelerator of openness in the financial and banking services industry. As Diana Milanesi notes in her working paper for the Transatlantic Technology Law Forum - A New Banking Paradigm: The State of Open Banking in Europe, the United Kingdom, and the United States - regulators have an important role to play in creating and promoting the openness needed for a new paradigm of banking to flourish.
Access to consumer data enables banks to design innovative products and services which could help customers improve their control over their finances. However, adequate safeguards and common regulations are needed to ensure consumer’s right to privacy and a healthy competition between banks in different countries, serving global customers.
“The value of Open Banking can only be realized when openness is nurtured and delivered in a responsible manner, which: maintains the trust critical to the functioning of the banking and the financial system; promotes transparency, privacy, and security in the use and disclosure of consumer financial data and account information by consumers who can control how to start, manage, and terminate access thereof; and ensures the continue safety and soundness of the banking and financial system as a whole.”
- Diana Milanesi
In Europe, the PSD2, or the revised Payment Service Directive, came into effect in January 2018, replacing the initial PSD from 2007. Issued by the European Commission (Directorate General Internal Market), it has been designed to regulate payment services and payment service providers throughout the European Union (EU) and European Economic Area (EEA). Its wider purpose is to promote pan-European competition and participation in the payments industry also from non-banks and to provide for a level playing field by harmonizing consumer protection and the rights and obligations for payment providers and users. The purpose of PSD2 is to enable bank customers, both consumers and businesses, to use third-party providers to manage their finances. As Open Banking begins to develop and evolve, this directive enables fintech companies to build applications on top of data from banks.
Data protection is another key element to consider, especially with the GDPR (General Data Protection Regulation) coming into effect this month. The European directive stipulates that data cannot be collected pertaining to a customer without their explicit and voluntary permission – with certain exceptions. In a report published last year, Deloitte analyzed the potential conflict between the two regulations, noting an obvious ambiguity over how GDPR defines sensitive data, in which each EU country is given latitude “for the processing of special categories of personal data (‘sensitive data’)”.
Open banking provides banks with the unique opportunity to move faster and better than other incumbents, given their extensive financial experience and customer insight. By creating a compelling digital banking experience, they could increase their relevance tenfold by following consumer trends and building smart business platforms.
As they look into the best ways to tackle the open banking trend, we believe that banks should take conclusive steps in the direction of newer, smarter business platforms that not only will help them be data-sharing ready and privacy-enabled, but also make them more competitive in the new financial market landscape.