Driven by a combination of regulatory changes and competitive pressure around the globe, open banking is becoming widely accepted, resulting in new opportunities for both banks and their clients. Open banking is a secure way for banks and financial institutions to provide access and connectivity to third-party providers, allowing them to build and develop extended applications and services for their clients. This makes it easier for companies to offer both different and innovative services while giving consumers and corporations more choices and more control over their banking and financial data. A common example of open banking is aggregating accounts through the use of an API where a provider can give clients access to their bank accounts across multiple FIs in a single platform.
APIs are critical technology enablers in open banking with several use cases across data analytics, account authentication, bank account integration, AP/AR automation, or even payment processing.
Open Banking around the world
Open banking has been heavily associated with the 2018 Second Payment Services Directive (PSD2) in Europe, which is known as the most comprehensive piece of legislation paving the way forward for open banking initiatives and seeking to achieve standardization across Europe. PSD2 allows fintechs to offer services by getting one of two designations: AISP (Account Information Service Provider) or PISP (Payment Initiation Service Provider). As the names suggest, businesses that are AISP certified can access and view account data through an API connection with their bank whereas PISP authorization allows a business to make payments on behalf of their customers.
Across the globe, 87% of all countries now have some form of open API activity, making open banking a global phenomenon. In the EU and the UK, the revised payment services directive (PSD2) & the open banking framework has mandated that banks open APIs to fintechs and other financial organizations. As of September 2018, there were 17.5M monthly open API calls.
In North America, the Department of Finance Canada launched an Advisory Committee on open banking to determine the benefits and opportunities that open banking could provide. In the United States, open banking has mainly been an industry-driven initiative, with large banks striking major data-sharing deals. For example, JP Morgan Chase’s partnership with FISPAN and Intuit, or Wells Fargo’s partnership with Xero and Finicity. Mexico passed the “Fintech Law” in March 2018 requiring banks to establish open APIs. Nigeria set up the Open Technology Foundation to develop open API standards. South Africa Reserve Bank has begun researching the establishment of a regulatory sandbox to foster collaboration with emerging tech startups. Australia openly endorses open banking guidelines. In Singapore, India, and China, fintechs are experiencing strong growth around APIs and data sharing. Examples include Mobile wallet growth in India after demonetization and Singapore’s central bank adoption of open API architecture.
DBS in Singapore recently launched an API developer portal that makes 155 services available, including rewards, payments, and fund transfers. 6 These services have already been used by partners like McDonald’s and Property Guru to improve their offerings to customers. In Europe, BNP has partnered with the Open Bank Project7 to make a wide range of APIs available in a sandbox environment in which developers can experiment before going live with customer offerings that incorporate atomized banking services like identity management.
How does this affect your bank? Why does it matter?
Customers want change - only 45% of companies are satisfied with their firms’ payments and banking capabilities and over 90% of treasurers expect to see a change in their treasury’s technology, driven by operational excellence and cost efficiency, as well as improved visibility of cash flow and accounting data.
Many financial institutions make the mistake of being in a state of inaction when it comes to developing their open banking strategy. But it's really important that during this time - as with any other change we’ve faced in the digitization of technology over the past few years - to really set your bank up for success and turn this into an opportunity to grow your business rather than be a threat. Accenture revealed some interesting stats on open banking that directly impact banks and FIs - 20% of banks’ traditional retail products-based revenue streams are at risk and a 10% increase in overall organic banking growth expected by most bankers through open banking - not to mention a 55% boost to banking revenue by the end of this year from the new opportunities API-enabled services have to offer. This is a way of new opportunities and differentiating from the traditional competition - and most major bank executives recognize his - approximately 99% of executives across major financial institutions plan to invest in open banking initiatives by the end of this year.
Let’s take a brief look at what’s happening in the EU for example, where open banking is most widely adopted and how that’s going to impact them in 2020. Insider Intelligence projects the revenue potential in the UK generated through Open Banking enabled small and medium-sized businesses (SMBs) and retail customer propositions to reach $2 billion by 2024 – a 25% compound annual growth rate (CAGR). Banks in the region that developed a strategy and were ready to invest in new opportunities presented by open banking will generate up to:
Banks can extend their API development beyond the minimum regulatory requirements to offer existing customers new services (such as single sign-on, pay with credit card rewards points, and credit drawdown), and export data to personal finance managers or small business accounting apps like Quickbooks and Xero. Banks can also sell their specialized services to other parties; for example, consumer credit check services to fintechs or identity management tools (like KYC) to smaller banks to enable their business. In some areas, such as the export of small business data to accounting apps, these integrations have existed for a while, but they were bespoke and constrained. In contrast, we are now moving into a world where these types of interfaces will be standardized and information sharing will become the rule rather than the negotiated exception. What does this mean for you? Being able to have a developer API portal that encourages third-party organizations to build solutions for your business or retail clients creating a way for your banking products and services to be offered in new ways, across different avenues can really make your customers happy and help you differentiate from your competition while doing minimal work and building meaningful partnerships.
Conclusion and resources to consider:
Banks must recognize that to capitalize on the opportunity of open banking, all stakeholders including banks, fintechs, third-party aggregators, regulators, and tech companies - will need to engage and share their learning as they embark on this journey together. Banks will need to choose between defending ownership of tools and financial data or playing a different kind of role in the banking ecosystem. Banks that are able to embrace new API-driven open banking initiatives can expect a potential revenue uplift of 20%, while those falling behind are at risk of losing 20% of revenues. So it’s really up to you. As open banking picks up momentum, do you want to be proactive or wait for your competitors to eat into your potential profits?
In the next few months, your bank should start thinking about open banking trends and innovation in your region, how data-sharing with fintechs and non-financial firms could be formed to better position you to take advantage of the services they can offer, develop a perspective on APIs and develop an overall strategy, better understand data privacy mandates and regulations in this space and finally, internal or external factors holding you back from moving forward towards this less conventional approach and how you can alleviate them. As your clients demand more personalization and better experiences, and the world moves towards open banking, your decision on how you’ll respond will impact your ability to stay competitive, and take advantage of the opportunities ahead of you.