9 minute read
Banking’s new normal
Open Banking will become the framework for banking and financial activity, here Shashank Nagavajhala, Enterprise Architect at Arqitek explains why this will come to be and why it is important to get it right
How do you define Open Banking?
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Open Banking is related to the broader recognition that individuals should have control over their personal data. Open Banking enables this by providing third-party developers with secure access to personal financial and other data held by the bank. This then enables the developer to deliver new services to individuals utilizing the underlying personal financial data.
At the implementation level Open Banking is the process of enabling third-party access to bank data through the use of Application Programmer Interfaces (API). It might sound technical and even mundane. However, the underlying implications are profound and far reaching.
Open Banking as a form of market decentralisation realises a spectrum of new business opportunities and associated revenues. As always, the downside is that profitability and even viability threats will reveal themselves to those that do not pay attention to these trends. We advocate the need as a minimum to begin to establish Open Banking practices and to find a way of practically exploring this domain.
Open Banking is particularly important as a market disruptor because it can be considered to be part of a broader trend towards the API Economy. The API Econonmy is one in which institutions collaborate and transact digitally through controlled APIenabled transactions. Such an economy benefits from far lower transaction costs than we see today. The enterprise is enabled digitally within; but its external transactions are now also digital. Through the parallel development of other key trends and particularly AI we are heading towards highly digitised enterprises transacting digitally.
In this context, Open Banking is a key enabler because it opens-up the market towards higher levels of financial transparency and integration. This in turn accelerates business transactions and leads to economic efficiency.
Shashank Nagavajhala, Enterprise Architect, Arqitek
Central Banks and regulators are therefore driving Open Banking because of the underlying economic advantages. Competitiveness at a national level is ultimately at stake.
We would assert that any bank that wishes to thrive in the emerging digital economy has no option but to carve out its involvement in Open Banking. It is ultimately a decision whether or not to embrace the future. The only question then is how. The winners will be those that take the most impactful and yet efficient route.
We suggest that this implies taking a lesson from the extensive work that has already taken place in Europe and elsewhere. We term this initial wave of activity ‘API Economy 1.0’ and not everything has gone smoothly.
Following the introduction of Open Banking in the UK, banks were forced to quickly comply with new open API regulations. From the 14th July 2019, banks and relevant financial institutions were forced to have 100% of their API’s live. However, only 69% of production ready APIs from all major banks in 12 markets were available. None were compliant with the then newly introduced standards.
Many of these challenges arose from a fragmented approach: • Acquisition of generic API platforms as the basis of the solution • Failure to establish and mature Open
API as a practice • Failure to leverage an architecturedriven approach • Failure to focus on API governance and monetization
Most certainly. We can already see how BigTech is impacting the financial services market. Apple Pay and Apple Card are primary examples. Big Tech and other actors have the scale to deliver global platforms that will increasingly challenge the traditional banks.
However, Open Banking also opens up opportunities for new market participants and at every level. Even garage startups
will be actively looking towards Open Banking as an opportunity to deliver new forms of innovation. In this respect Open Banking can be seen as a catalyst for innovation and for the emergence of a new breed of FinTech and other innovators. For the traditional banks it is clear that new strategies are necessary. The banks will need to chart their position in the new economy. Their strategies may rely on the extensiveness of their own networks or on their ability to transact efficiently or perhaps in the customer-centric nature of their services. Some banks in the region have already awoken to this reality and there are already instances of banks running hackathons as they actively engage in the new market. Others have yet to respond and can be seen to holding firmly to traditional models.
The primary risks for a banks at this stage is to fail to learn from the market. A wrongly directed approach can lead to significant complexity which ultimately leads to a lack of agility, inflated technology costs and potentially greater security exposure.
Beyond this banks will need to focus efforts in understanding the underlying API Economy trend and what it means for their market positioning. Only those banks with the digital awareness and the ability to align business and IT perspectives can be expected to be relevant in the new economy.
The potential to innovate
Open Banking will reshape the competitive landscape and customer experience of the banking industry. Wissam Khoury, Head of International at Finastra explains that while it offers potential risks, the gains to consumers and banks will be clear
How do you define Open Banking?
Open Banking, simply, is the ability to share financial data with third parties. It is built on the premise that the data related to financial services customers is safely owned, used, and controlled by those customers. At a fundamental level, Open Banking facilitates well-rounded financial services in payments and account aggregation. And beyond this, the digitization of data allows fintechs and banks to effortlessly collaborate, bringing the financial ecosystem closer together.
Open Banking enables the industry to become more competitive and therefore offer consumers better, cheaper services. It brings changes to how banks handle their customers’ financial information, putting control back in the hands of the customer. It means that customers can opt to share their financial information with authorized providers, to gain access to new services and innovation to help them manage their money better.
Open Banking is driving the industry toward hyper-relevant, platform-based distribution, and provides banks a rich opportunity to expand their ecosystems and extend their reach.
Wissam Khoury, Head of International at Finastra
A 2020 survey by Finastra revealed that nearly nine out of 10 financial institutions in the UAE plan to enable Open Banking in the next 12 months. The appetite for Open Banking is definitely growing. A key driver for banks to adopt tech-driven innovations like Open Banking in the UAE is to cut costs or improve efficiency – a factor cited by 59 per cent of the survey respondents. We are
seeing more and more banks embracing Open Banking because it gives them advantages in optimizing cost structures and increasing revenues.
Leveraging Open Banking is an opportunity to create new revenue streams, retain and acquire customers, and simultaneously staying competitive in an increasingly crowded market. The success of any Open Banking business model will be contingent on the value it creates, or the monetization opportunities it brings.
To realise its true potential, Open Banking needs a foundational technology that can facilitate scalable innovation and accessibility. Cloud is an opportunity like no other. It enables banks to run a more cost-efficient operating model while providing the agility and modernity that legacy on-premise models lack. Integrating third-party fintech into bank IT infrastructures can be completed seamlessly via APIs. Moreover, cloud solutions can also improve operational efficiencies through enhanced automation and resilience.
These benefits will influence the way banks evolve their operations. Many banks are still operating on-premise, but an increasing number are now using a hybrid model for cloud applications such as CRM and HR, connecting these to their on-premise core. Established banks are starting to use private clouds, through which they can take advantage of the distributive processing power that cloud provides and simplifying their IT infrastructure.
Consumers’ attitude towards banking has shifted tremendously in recent years. The rise of technology use and significant mobile penetration has created a new ‘digital native’ banking consumer, who demand online services that are quick, agile, and on par with what they see in other sectors such as retail and social media.
Open Banking has compelled banks to become more transparent, and enables consumers to compare offerings from different banks, whether for mortgages or loans. It has also led to transparency between transactions and payments, which, in turn, has created a transparency
in the market of how money is flowing and where it is going. Open APIs have not only created better user experiences but have also created a new model for banking.
The World Retail Banking Report 2019 highlighted that 50 per cent of consumers anticipate using technology giants for financial services by 2022. Consumers are relying on their financial providers to offer products and services that address their needs beyond traditional financial services; greater collaboration with other fintechs could strengthen this connection to the customer. Tech giants have entered the financial services delivery from a number of different starting points. Application- and data-centric firms like Microsoft, Apple and Google are entering into financial cloud computing from a technology and data management perspective. For today’s bank, collaboration is essential to defining a competitive edge. It is no longer possible to aim for success in isolation. Innovation rarely comes exclusively from within, and the sooner banks realise the inherent value within the new, open ecosystem, the better they can secure their own relevance.
One of the greatest advantages that traditional banks retain is access to data. By leveraging this through partnerships
with third-party fintech services in a more open and collaborative model, banks can deliver the best customer experience and maintain a cutting-edge technology service. Again, it will depend entirely on a mind-set shift to embrace openness as an enabler.
We believe that platforms for open innovation like Finastra’s FusionFabric. cloud will be key in enabling the entire ecosystem to collaborate.
Open Banking allows validated third parties to access relevant customer data through secure open interfaces. Banks must proactively implement steps to ensure that customers are able to take advantage of new services without their personal data being compromised.
Essential steps that banks and partners can take include encryption, so that data cannot be read if intercepted; proactive threat detection that identifies attempted intrusions; and the adoption of multi-factor authentication at the customer access point.
