The Open Banking Revolution - API Driven Approach

Posted in Finance Articles, Total Reads: 242 , Published on 26 November 2017
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Technology has already redefined how we bank – from mobile apps to AI that analyzes our voices to help us access our bank accounts, from Core Banking systems to Robotic Banking Assistants. We now stand at the threshold of a future where banking will transmigrate from an individualistic phenomenon to one where the entire ecosystem gets integrated to provide more efficient services to society. Open Banking is essentially a financial revolution that will be driven by customers’ demand for more seamless services, more robust regulatory mandates, the increasing encroachment into the financial sphere by “Fintech” start-ups, and the power of Big Data Analytics.

We see Open Banking not merely as a technology or business model, but as an entirely new paradigm that will change the manner in which banks, individual customers, corporates and regulatory bodies interact with each other.


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THE OPEN BANKING STANDARD 

Open Banking is a platform-driven paradigm wherein banks and other financial institutions can use open source API’s (Application Programming Interfaces) to empower themselves to securely and rapidly enhance their offerings using an ecosystem of 3rd party applications and services. It is important to recognize Open Banking as a two-way platform – one that enables both banks as well as third party institutions to benefit from the shared data. In 2015, the EU established the Open Banking Working Group (OBWG) to propel banking into the modern era.

1 It gave rise to the Open Banking Standard, which examines regulatory and technological frameworks to implement a new set of financial models that will help consumers transact, save, borrow, lend and invest their money in better ways than before. In August 2016, the United Kingdom Competition and Markets Authority (CMA) issued a ruling that required UK’s nine largest banks to allow licensed startups direct access to transaction account level data.

2 The complexity of the Open Banking architecture is a reflection of how much of a multi-dimensional challenge this paradigm poses. It comprises 9 primary layers – Data & Services, Adapters, Monitors, Resource Access, Resource Models, Access Control, Moderated Resources, Presentation and API Management.

3 The architecture will support an API-based model to invoke business process or data elements, which are deemed appropriately secure by a third party (client, business partner, other financial institution, commercial enterprises, etc.).

The Open Banking revolution will essentially see a common platform on which a variety of stakeholders would be able to interact. Such stakeholders would include banks, individual customers, corporates, regulatory bodies, governments and third party service providers. The Open Banking platform will function as a mesh of interconnected API’s that will enable a variety of services to be seamlessly carried out. These would involve the interaction of banks with each other, customers, companies, policy-makers, Wealth Management firms, Tax Planning advisors and microfinance institutions.


A PARADIGM DRIVEN BY ROBUST REGULATORY FRAMEWORKS

We undertook a thorough evaluation of current trends and drivers within the global banking space, to help us envision a future in which Open Banking will play a major role in helping the sector to burgeon. Here, we examine how the regulatory environment is expected to shape the BFSI space, and present an approach that considers how banks, customers and other third parties will evolve over time. The advancement of technology and the interconnectedness of economies would have implications for the setting in of systemic risks that would compel regulators to impose stricter rules that facilitate real-time reporting and data transparency. We hence foresee an overarching regulatory framework that will mandate banks to come aboard a standardized, open platform, driven by API integration. We expect Open Banking to gradually develop with standards both from the technological as well as compliance perspectives. Moreover, such standards would exist at two levels, one satisfying country-specific requirements, the other enabling seamless integration with applications around the globe.


HOW WILL OPEN BANKING CREATE VALUE FOR FINANCIAL INSTITUTIONS AND THIRD PARTIES?

We propose the following three strategies for banks to leverage the opportunities offered by, and thrive in, this banking revolution. In any of these, the key to success will involve striving to become the first mover.

Monetizing Data:

Firstly, major banks can build sustainable competitive advantage by investing in a platform that uses the Open Banking system to aggregate customer information derived from diverse sources. This data can be monetized by selling to various third parties such as insurance companies, travel agencies and retailers – virtually anybody who would be able to leverage the insights gained from this data to better market their offerings. For example, major retail chains can purchase data related to consumers’ spending patterns and credit card usage, and use this in conjunction with Big Data Analytics capabilities to offer customized promotions to their customers. Similarly, insurance companies can use such data to create more informed risk profiles of their clients and develop customized insurance products.

Strengthening Core Operations:

Further, banks can internally use such data, after subjecting it to Big Data Analytics systems, to offer customized investment products, tax-saving products, and relevant advisory services. They can also capitalize on the Open Banking platform by utilizing data shared by other institutions (Other Banks / NBFC’s / regulators) to perform quick due diligence of prospective customers for lending purposes. This would not only help them service their customers faster, but also help them avoid bad debts and improve their net NPA ratios. Finally, banks would be able to rationalize their marketing spends by targeting specific customers who are more likely to buy their products, based on insights garnered from the data shared over the Open Banking platform. For example, through API’s that connect them to certain travel agencies, banks can identify prospective customers for selling customized FOREX cards, based on their likelihood of travelling abroad in the near future.

Efficient Integration of Cryptocurrency-Based Micro-Economies

The third strategy involves leveraging the Open Banking platform to hop aboard the Blockchain and cryptocurrency bandwagon in more efficient ways. The world is rapidly getting engulfed by a revolution in payment mechanisms and digital currencies, with cryptocurrencies such as Bitcoin and Etherium increasingly gaining acceptability as a medium of exchange. In fact, entire countries are adopting cryptocurrency-based economies. Banks can tap into this opportunity by allowing cryptocurrency payment through its Open Banking platform. However, integrating and reconciling regulatory frameworks for Open Banking and Blockchain will pose a major challenge.


CREATING VALUE FOR CUSTOMERS

Open Banking promises a more enhanced experience for consumers – an experience that transcends the financial services domain. This revolution will ensure that customers are not bombarded with irrelevant promotional material from banks, enabling them to easily identify their true banking needs. Customized financial products will help reduce long-term costs and provide value-added benefits. Moreover, Open Banking platforms will enable customers to easily compare financial products and services across banks and make informed decisions. Open Banking will empower wealth management practitioners to design optimized portfolio solutions for their clients, hence creating financial value for them. Corporates and individuals will be able to draw data automatically from relevant bank accounts via the Open Platform, instead of manually maintaining records and entering data into tax planning and filing software.


CHALLENGES AND THE WAY AHEAD

The implementation and deployment of a project of such large scale and complexity requires seamless integration not only of technological standards but also regulatory frameworks. API design needs to be standardized for use on the Open Banking platform. However, it must also comply with business requirements of the individual third parties. A pressing challenge that will be faced by banks will be the ability to leverage Open Banking’s benefits sufficiently to compensate for revenues lost to competitors due to the transparency and flexibility that the system affords to customers. Security and privacy will probably be the greatest causes of concern in an Open Banking ecosystem.

Where do you draw the balance between allowing data transparency to create value and to succumb to compromising a client’s financial data? How do you ensure that sharing of data does not compromise the privacy of a customer’s financial activity? How do you shield the banks, customers and third parties from system hackers? And will the Open Banking paradigm topple the very foundations of trust, customer loyalty and relationship management on which the banking industry has been built over the ages?

Open Banking requires a complete overhaul of existing financial services regulations. Policy-making, integrated with a focus on risk management, will need to take the center-stage in the immediate future. Standards and regulatory frameworks will need to be adapted at the global and national levels. Moreover, the success of the revolution will hinge on a complete alteration of the consumer’s mindset. Open Banking promises fantastic opportunities for a future that might very well change the way we shop, transact and live!


This article has been authored by Yash Vashisht and Zubin Unwalla from XLRI


REFERENCES:

1. (May 16, 2016). “What is Open Banking and Why Does it Matter?” The Financial Brand

2. Rowland Manthorpe. (October 16, 2017). "To change how you use money, Open Banking must break banks". Wired

3. Simon Redfern. (August 1, 2017). Open Bank Project Architecture. Open bank Project website


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