Introduced in the UK in 2018 under PSD2 and the Open Banking directive, Open Banking has continued to gain momentum, with over 2.5 million UK consumers and businesses now using Open Banking and adoption trends continue to accelerate. Open Banking is being used by both consumers and businesses around the world to access their banking data more easily and to better manage their finances in a number of different ways. In this article, we will identify the key risks and opportunities that Open Banking presents for banks, what types of capabilities that banks will need, and the pivotal role that innovation sandboxes can play within this.
Before delving down into the risks and opportunities, it’s important to state what we mean by ‘Open Banking’ and ‘Open Finance’. Broadly speaking, Open Banking is the global trend towards greater sharing of data, products, and services across organisational boundaries, most commonly using APIs (Application Programming Interfaces). Open Banking in this article refers to the various international regulatory directives, as well as the wider global trend towards banks and other financial services players opening access to account and transaction data to third-party providers (TPPs). ‘Open Finance’ is the term used to describe the extension of Open Banking data-sharing principles to a broader range of financial sectors. This may include Investment accounts, Insurance, Pensions and more, enabling a holistic view of customers financial lives.
Where Open Banking is mandated by regulation, banks have to comply with a strict set of requirements which vary dependant on the market. In Europe under PSD2, banks are mandated to open their APIs to TPPs to enable them to access account information and initiate payments on behalf of a user. Similar directives are being enforced across a variety of other geographies:
Canada continues to make steady efforts towards adopting a workable Open Banking framework, whilst the US has opted for a market- led approach.
Australia has taken significant steps towards Open Banking, overseen by the Australian Competition and Consumer Commission (ACCC), has taken significant steps towards open banking. Consumer data relating to credit and debit cards, deposit accounts and transaction accounts are now available to be shared, as well as home and personal loans.
Hong Kong & Singapore monetary authorities have launched playbooks and frameworks designed to support data exchange and communication between banks and FinTechs.
The Central Bank of Brazil is moving forward with its own open banking regime, with implementation commencing in November 2020, aiming to be fully operational by October 2021.
Banks in the Middle East and the UAE are exploring Open Banking and data sharing initiatives, driven by a consumer landscape that has some of the highest mobile penetration rates in the world.
India is widely regarded as optimally positioned for Open Banking with a National ID scheme, instant payments infrastructure, P2P payment schemes & policy frameworks on account aggregation, P2P lending and blockchain.
Open Banking has led to significant changes in the complexion and competitiveness of the banking sector. Access to consumers’ financial data has enabled a new wave of FinTechs to successfully enter the market, providing a range of services to help consumers and businesses better manage their finances. These FinTechs often specialise in niche pockets of financial services, from personal finance management (PFM) players like Chip and Plum, to automated accounting services from current account provider Coconut.
We’re not just seeing new FinTech upstarts enter the space, existing Tech and Platform players are also accelerating their entry into financial services.
• In August 2019, Apple and Goldman Sachs teamed up to launch the co-branded Apple Card which aims to deliver greater control, transparency, and privacy to consumers
• Google launched a major redesign of its Google Pay app in November 2020 on both Android and iOS, with a significant focus on helping users better manage their personal finances
• Amazon is working in partnership with several banks globally (including ING and Goldman Sachs) to offer loans to SMEs via their lending platform
• Shopify has launched a variety of financial services products for small businesses currently utilising their platform, including Shop Pay and Shopify Balance – the latter being powered by Stripe’s latest product, Stripe Treasury
The adoption of Open Banking has been accelerated by the impact of COVID-19. Since the pandemic first set in, we’ve seen radical changes in consumer behaviour, with economic activity rapidly shifting online and customers becoming increasingly likely to transact through digital channels. The evidence is clear to see, Banking API provider Truelayer saw uasge of their Payments API grow by 832% between March and July 2020 , when many European countries were in lockdown. This trend looks set to continue, with consumer confidence in digital channels and the services available to them at an all-time high.
“Banking API provider Truelayer saw uasge of their Payments API grow by 832% between March and July 2020”
Open Banking regulation has pulled banks into the API economy, removing one of their key protective moats that was provided by data ownership. Banks no longer own the full customer journey and there are now a multitude of new emerging players that are looking to disintermediate the customer relationship and attack profitable parts of the value chain:
Open Banking Payments and other rich payments solutions e.g. real-time payments
• Targeting historically underserved groups such as SMEs
• Expanding capabilities up the value chain and horizontally e.g. Square expanding from a niche Point-of-Sale solution into a broad financial services organisation
At the same time, consumer expectations around the level and quality of service they receive are also changing. The customer-centric financial products being offered by FinTechs and other Platform players has led to an increase in pressure for banks to provide new innovative offerings. Consumers are increasingly demanding:
• Financial products at the point of formatting need e.g. buy now pay later financing when shopping online
• Seamless digital experiences with minimal friction e.g. digital onboarding in minutes
• Access to a broader set of financial products e.g. digital assets, subscriptions, flexible finance
Banks run the risk of becoming dumb pipes, providing customers with accounts that are negatively unprofitable for the bank due to increasingly high legacy infrastructure costs with limited revenue potential.
Conclusion: Banks need to embrace and build on Open APIs if they are to thrive in the years ahead, regulatory compliance is essential but not sufficient on its own.
But what do Banks need in order to seize upon the opportunity that Open Banking presents? At Oolys, we believe there are 5 key capabilities that banks need to acquire:
One approach to counter the risk that Open Banking poses, banks can partner with FinTechs and other TPPs to launch valuable new propositions and services that are relevant to their customers. Leading incumbent banks are already working to re
structure their business models to drive innovation and seize upon the revenue opportunities that Open Banking presents. Exposing APIs out to the third party developer community will be key to driving innovation and unlocking tangible value.
There are two main ways in which Banks can look to adapt their business models to incorporate Open Banking and become API-driven:
i.e. aggregating traditional propositions with new and digital services from third parties to offer innovative services to customers through the bank’s own channels. Enabling banks to differentiate themselves from competitors through novel customer-centric offerings that can be targeted at specific customer groups. (e.g. Starling marketplace brings together a variety of different financial products from third parties and makes them available to Starling customers. From mortgage and insurance providers to smart pension tools)
i.e. using APIs to distribute core financial services products through third parties, increasing the reach of the bank to new customer groups (e.g. DBS Bank in South Asia has launched a market-leading developer portal where they make 200+ APIs available to third parties to experiment with and test value against, prior to embedding them within their own offerings). In addition to the potential for increased revenues from third parties paying to use their APIs, banks are also able to use these distribution channels to grow their customer base and cross-sell to existing customers.
Oolys is a market leading sandbox already working with Tier 1 organisations around the globe supporting Open Banking regulatory compliance and innovation activities.
Built to conform to the latest financial grade API (FAPI) specifications with a multi-option security solution. Providing TPP and internal developers with a flexible and highly secure testing environment.
Comprehensive core banking simulator with dynamic test data. Enabling developers to experience end-to-end customer journeys through a mock bank that identically replicates a real-life production experience.
Programmatic simulation for the approval or refusal of consent on behalf of a test user via API, providing a way for TPP developers to fully automate their testing in the Sandbox. By adopting Oolys, banks have a turnkey solution that immediately delivers the dual benefit of regulatory compliance and innovation via discretionary APIs and a developer sandbox.
For more information on how Oolys can accelerate your Open Banking journey reach out to us at: info@oolys.com
Photo Credit: Aron Visuals on Unsplash
