How Open Banking will revolutionize retail banking
Europe’s open banking rules may be the beginning of a revolution within the financial sector, i.e. for banks, fintech start-ups and even for big tech companies involved in payments and other bank-like services. Open banking has steadily gained traction over the last years. In fact, one way to measure its impact is to monitor the number of “API calls”, that is, how often third parties request consumer data from a bank account using a technology known as an “application program interface”, or API. Figure 1 shows that the number of successful API calls in the UK stood at 215.3 million in November 2019, up from 1.9 million in June 2018. Meanwhile, more than 1 million customers have now used open banking services.
Such an increased trend towards Open Banking implies that easier access to data has become a hot topic, especially in the financial (technology) sector, where from a commercial standpoint, it can serve as a catalyst for new products and business models. The EU has been proactive on this front, setting the rules of engagement through the updated version of the “Payment Services Directive (PSD2)”, which is an essential milestone for the so called “Open Banking” trend. In fact, Open Banking is pushing financial institutions, such as typical retail banks, into revolutionizing their business model — starting from their products, services and their whole IT culture that underpin it.
More concretely, open banking is defined as the sharing and leveraging of customer-permissioned data by banks with third party developers and firms to build applications and services, including for example those that provide real-time payments, greater financial transparency options for account holders, marketing and cross-selling opportunities. Such an innovation could offer opportunities to those who will manage the change that will occur in the relationship between consumers and financial institutions. Information concerning customers’ personal data may be shared, in addition to information regarding movements made on the current account, the available balance and the subscribed banking services and products.
The first European country to act accordingly was the United Kingdom and its Competition and Markets Authority (CMA) in August 2016, where it issued a ruling that required the nine-biggest UK banks — HSBC, Barclays, RBS, Santander, Bank of Ireland, Allied Irish Bank, Danske Bank, Lloyds and Nationwide — to allow licensed start-ups direct access to their data down to the level of account transactions. The direction came into force on January 13, 2018.
Several other countries launched open banking initiatives based on the European and UK model. An open banking project was launched in Australia on the 1 July 2019 as part of the Consumer Data Rights project by the Australian Treasury department and Australian Competition and Consumer Commission. On 1 June 2017, a group of bankers and fintech experts in Nigeria got together for the Open Banking Nigeria initiative to drive the adoption of common API standards for the country.
The Payment Services Directive 2, however, is a Europe-wide Directive applied since September 2019. This directive redefines the role of institutions and suppliers of digital payment instruments and was issued for the purpose of providing a stimulus to innovation, efficiency and competition, paying greater attention to the protection of users. A further aim of PSD2 is to harmonize the rules for the protection of the parts that take part in the payment process, those who provide the service and those who receive the payment, but also to harmonize the rules of the banking sector and the neobanks.
In fact, with growing open banking policies set to take effect, new market players such as neobanks or B2C companies could also enter determined market segments, where, from a historical perspective, traditional retail banks have been the more popular choice for people. Now, it all depends on who can establish a sustainable connection and relationship with the actual end-consumer in order to gain market share.
One of the most important innovations to achieve the aims that the PSD2 and Open Banking have set itself is the introduction of the obligation for banks to open their own banking APIs (i.e. the Application Program Interfaces) to the companies that deal with FinTech or financial products and services. APIs (Application Programming Interfaces) are standardized programming interfaces that allow and facilitate dialogue between multiple providers and therefore interaction between applications. They therefore allow the automatic exchange of data, without the aid of man and shorten the programming times. In this way they allow the creation of applications that access the characteristics or data of an operating system.
In the case of the banking sector, open APIs allow you to share customer data with companies and third-party apps in a secure and real-time way. In this way, the latter can create new useful and increasingly personalized innovative services from customer data. The development of API ecosystems will allow consumers to take advantage of new products and services, for example to improve their financial management. In fact, the use of open APIs gives developers the opportunity to create innovative services and applications, with greater financial transparency options for account holders and giving added value to customers compared to competitors.
Let us summarize what we discussed so far: The phenomenon “Open Banking” will lead to greater competition even in areas of traditional banking dominance. Banks will now have to consider the many new opportunities offered to customers by other companies. In addition, customers will request services more relevant to their predispositions and user centered. For this, the role of the bank as a customer service provider will be questioned by the new FinTech companies and by tech retail companies.
Moreover, it is usually a cumbersome process for customers to access their financial information if they are with one of the traditional banks, making it hard to switch to a different institution for a competitive offer on financial products, like a home or personal loan. This is where open banking can unleash its potential. These new regulations ensure that traditional and established banks give smaller and more dynamic competitors greater access to their customer data, which, on the one side, can help customers make a change more easily, and on the other side, improve competition in the banking sector.
Therefore, the key drivers for a successful open banking ecosystem are the following ones (Figure 4): Customer Demand, Regulation, Technology Trends, and Competition. The financial industry and its historically seen top players are exposed to an unprecedented torrent of innovations and regulatory norms, that are leading to an increased offer of services satisfying customer demand, who have been advocating for more transparency and tailor-made products.
Authors:
- Francesca Barbaglia
Sources:
https://www.bankinghub.eu/themen/open-banking-far-more-than-psd2
https://www.bis.org/bcbs/publ/d486.htm
https://www.virtusa.com/perspective/open-banking-and-digital-transformation-trends-facts-and-figures
https://www.bankinghub.eu/themen/open-banking-far-more-than-psd2
https://home.kpmg/xx/en/home/insights/2019/05/open-banking-for-greater-customer-value-fs.html
https://www.mckinsey.com/industries/financial-services/our-insights/data-sharing-and-open-banking
https://www.forbes.com/sites/vishalmarria/2018/12/10/how-open-banking-has-changed-financial-services-so-far/#7c5bbd853e07
https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/56637231
