In a recent post on McKinsey about Open banking, it said –
Open API [Application Programming Interface] is a concept to allow global users [ read it as developers and programmers] to access the web services and software applications. You may think why one should allow its code to be freely available? Consider this – an API is a language that a machine understands, to make it talk to a third-party system or another device you would need to provide a handshake channel, and that’s what Open API does. Have you ever noticed while traveling from one state to another how quickly we get an SMS from the service provider saying – Welcome to “new” state! So even though your mobile is specifically for calls, it also reads the area you are in and sends it to the local service provider which may differ from your home service provider.
The potential benefits of open banking include improved customer experience, new revenue streams, and a sustainable service model for underserved markets.
Well, the benefits may be seen in the long run. However, the topic of the hour is Open Banking. Do the technology, data and products need to be accessible or restricted? Well, that’s what this post would talk about -
Vishal's take on OpenBanking
What is Open Banking? What is Open API and What is Open Data?
Open Data concept also serve the same benefit of providing data as an open source that could be reused to build more apt, reasonable yet smart solutions for the individuals. Just for example if government openly provide the data on people who are unbanked in a district, it would be easy for fintech startups to reach out to the target audience.
Using the Open API and Open Data Concepts Open Banking is evolved that also must follow a set of regulation from - Competition and Market Authority’s (CMA’s) ‘Open Banking remedy’ and the European Payment Services Directive 2 (PSD2). Open Banking is a term used by the financial institutions to –
OpenBanking is inclusive of OpenData and OpenAPI
- Improve customer satisfaction and banking experience
- Provide Transparency to its customers in availing banking services
- To share the financial transactions with third parties
- Third parties can initiate a fund transfer from an individual’s account to pay the bills or shopping bills
How Open Banking Works?
Now let's take a quick example to know Open Banking works – Consider two firms A and B, while A is a fintech firm offering core banking solutions firm B is an expert in data churning and analytics. A customer uses a software/mobile app for his banking services like checking account balance, paying of utility bills but he needs to know which category is he spending more. For this he has two solutions, first to manually maintain an account book or second integrate his banking app with the solution offered by firm B and look at the spending’s chart. Here if the two software of firm A and B are communicating with each other, they are –
- Talking via an open API
- Sharing transactional data about the customer
- Helping customer get a better banking experience
The Firms investing in Open Banking
Capgemini - In one of their reports, Capgemini highlighted a case study where they have integrated a bank software with online travel service [international travel]. With Open API the travel desk can offer its customers convenience of purchasing foreign currency before their journey.
Wipro - In another news Wipro also launched their open Banking API platform. The platform will help Banks and other financial institutions to provide access to the third-party application, new distribution channels and servicing that complies with regulatory norms.
IBM - As per a report from IBM , when one of the European banks adopted IBM API gateway it resulted in bank’s flexibility to select new digital channels.
IndiaStack - One of the fore frontiers in the game on Open API, IndiaStack with its unique solutions let start-ups, businesses, governments and developers to build their own innovative solutions to hard problems.
Advantages and Disadvantages of Open Banking
With so much innovation and opportunity in this space, let's look at the pros and cons of Open Banking -
Advantages of Open Banking to Banks
- Automation is easier - With banks and fintech firms providing open API it gets easy for the workflow to automate and for a smooth transaction to happen.
- Aggregation of Services - How about using a comparison model of a financial management software to know the best yield for a mutual fund? These kind of aggregation would also boost customer trust and loyalty.
Advantages of Open Banking to Customers
- Customer reaps the benefits and picking what he likes - You use a banking app but not keen with its financial advisor module so that you could switch to another third-party app/software. He is not forced to use that specific software because it is bundled with his/her account.
- More customized and relevant product offerings - With Open Data if lenders know the financial portfolio of an individual, based on that they could provide a better loan plan or credit cards. It would not only help the individual from the burden of debt but also would save money for lenders in verifying their history.
Advantages of Open Banking to Fintech
- Easy Way For Banks to Extend Their Services - Fintech firms with their innovative and unique solutions could easily handshake with banks and financial instructions via Open API to make the product offerings more customized and exotic.
- Meet The Customer Requirements - Today clients, are not satisfied with age old offering, they demand for innovation. How about paying back one of my friend via whatsapp? Open API could help them offer that, while banks are busy in handling regulation and offering banking services, fintech firms can innovate and lure customer base while offering convenience and security.
The concept is still building up, and till date, we have not encountered a scenario that could go against the Open Banking. However, with the rise in cyber threats and crime and when software/application are available for free, it would be wise to first check the authenticity of the software before allowing it to connect to your banking information.
Disadvantages of Open Banking
Also, as reported by McKinsey in their blog – We would see a shift in Data privacy that would mean Regulation and laws need to be streamlined. And the biggest challenge amongst this is we do not have global regulation, for each country/region the governance change. Hence it would be a challenge to take up the concept to the next level.
Another disadvantage we may witness in future is that OpenAPI will limit financial institutions to introduce innovative and unique services as differentiating factor from competitors. As with in no time every financial institution can rollout same service.
Teknospire take on Open Banking
On asking Vishal Gupta – the CEO of Teknospire, the Indian fintech firm on whether Open Banking – is a friend or foe, he says - Banks have taken a long way to learn- Adoption to Change is the need of the hour. While banks have a choice to build their technology divisions OR collaborate with fintech firms, and we do witness the latter one in trend.
Banks enjoy the large customer base, trust, established regulatory recognition and processes while the fintech is bringing in the disruptions. Collaboration is the way; we see that Open API Banking will lead the way for Banks and Fintech. Europe being among the first ones with the rollout of their second Payment Services Directive (PSD2) is on the verge of banking innovation. Now with the collaborative efforts of the banks and fintech, we would see the results in the coming years and benefits delivered to consumers for comfortable, secure, affordable and transparent access to product and services. If this collaboration fails, then I would guess that PSD2 would end as a hyped-up lip-service.
Open Banking comes with lots of opportunities that could change the banking ecosystem, but with its also comes new challenges, risks, and regulation. While the concept could be more lucrative when combined with latest technology solutions like the Internet of Things [IoT] or Artificial Intelligence[AI] it needs more focus on the traditional environment, to adapt to this new change.
5 Reasons You Should Use OpenAPI / Swagger for your APIs
The Digital Advantages of Banking as a Service
What is Open Banking and Why Does it Matter?
Open Banking A Consumer Perspective Faith Reynolds January 2017.pdf
Open banking APIs are open for business
How Financial Service Firms Can Benefit from Open Banking APIs