Around the world, regulators are considering ways to encourage traditional players to ‘open up’ customer data, to stimulate competition and standardise security protocols. While legislation is already on the way in some parts of the world, regulation alone cannot ensure the successful implementation of an open architecture framework in banking and finance.
Open APIs (Application Programme Interfaces) have already changed our day-to-day lives. When you jump in an Uber and connect your Spotify account, or search for a restaurant on Yelp and get directions from Google Maps, you’re using an API. Banking applications are somewhat more complex, but even more impactful.
In addition to increasing competition and improving safety and security online, open APIs in banking have the potential to provide us with a more holistic view of our finances, empowering consumers and SMEs to make more informed decisions. After all, who knows better than your bank if you’re overpaying a bill, or spending more than your peers on your internet package.
For an open architecture framework to become the norm in banking and finance, three moving parts must work together to build a cohesive infrastructure. Let’s dive in…
We recently attended a discussion led by The World Economic Forum in London where potential ‘open banking’ scenarios were explored. One such scenario was the possibility that The Revised Payment Services Directive (PSD2) will encourage regulators around the world to accelerate the process of ‘opening up’ banking data, leading to the global adoption of open APIs.
We can see regulatory rumblings around the world. For example, The Competition and Markets Authority’s ‘Open banking Remedy’ in the UK covers similar terrain as PSD2. In Australia, the government recently asked its Productivity Commission to examine the role of open APIs in facilitating data sharing between banks and third parties and imposed aggressive timelines to create a binding framework.
The future of open banking in the US is not so bright. Legislation is not on the immediate agenda and it’s not yet clear if lobby groups like The Consumer Financial Protection Bureau (CFPB) will lead the charge. The consensus is that its current political landscape is not particularly conducive to the open architecture framework which will underpin PSD2 in Europe.
Although regulation has an important role to play in the next iteration of the digital transformation of banking, it can’t do it alone. The industry must also be on board.
As the name implies, for ‘open banking’ to work, the banks need to be on board. Independent financial commentator, Chris Skinner recently commented that “the banks are scared.”
A recent study by PWC paints a similar picture, finding 68 per cent of bankers fear PSD2 will result in the loss of customer interactions.
Despite some initial trepidation, the advent of open APIs in banking puts traditional players in the unique position to provide more innovative services to their clients, widen the scope of their distribution strategies and standardise security protocols to mitigate risk.
We have already seen some traditional players embracing open architecture frameworks before they are legally required to do so. Spanish bank BBVA has created an open API platform and appointed Shamir Karkal, a former co-founder and CFO of Simple, to lead the API business unit. In addition, Nordic bank Nordea recently announced an open banking site for external developers to experiment with open banking APIs. Other players will wait for the full picture to emerge, still unsure of what the technical requirements will be.
In any case, the traditional players will retain the all-important customer data, and as such, have no reason to be “scared”.
Research shows new propositions based on open banking are likely to be quite attractive to consumers, despite a general lack of awareness and understanding of what it means.
A study by credit referencing agency Equifax found 90 per cent of British citizens polled had not heard of the open banking initiative. Furthermore, a recent study by Ipsos Mori for Barclays showed that almost 40 per cent of consumers would be happy to share their data to receive personal financial management services. This number is even higher among 18-24-year- olds. At Spotcap, we have also seen this willingness first hand. SMEs are willing to share their banking transaction data in exchange for the simple and efficient processing of their loan application.
An open architecture framework in banking is also set to change the way we make payments. Consumers have had more than 50 years to become accustomed to paying by card, and have developed an innate sense of personal protection over them. Before we can make the colossal shift from plastic to digital we need to establish a similar level of trust in banking APIs as we have in our cards.
Although global regulation is unlikely, PSD2 will set the precedent and provide a starting point for regulators around the world. Industry commitment and trust are also crucial to the successful implementation of an open architecture framework in banking. We look forward to watching it all unfold.
This article originally appeared on Finextra.
Jens holds a degree in industrial engineering from the Technical University of Berlin and studied economics at Cass Business School. He worked as a consultant for McKinsey & Company for more than five years, where he focused on the commercial banking sector. Working for major European banks, Jens experienced the outdated approach these banks took towards working with SMEs. He co-founded Spotcap after seeing an opportunity in the industry: to use technology to change the SME banking landscape.
Originally published July 3 2017 , updated January 22 2020