Open up Banking Data, A boon or looks Scary

In the manual banking era, the customer and account related information was available only to the respective Branch users/managers who serviced the customer. With the advent of computerization and anywhere banking the customer and account related information is available for viewing by multiple audience, though subject to the system access controls/policy of the bank.

Thanks to the new open banking regulation in one of the geographies, Banks are mandated to share/open up customer’s data to organized institutions in a phased manner. Well assuming this is for good and hoping that competition will bring in innovative products and services at competitive price to the customers.

There is a little background to this regulation as Banks design various products, services and also associate price, till date. There by they have control on the customers to a large extent. Of course there could be few customers who may compare different banks and associate with one who offers the best. But beyond Banks, there are niche Fintech’s/small players (we will refer them as startups) who might offer disruptive and revolutionary products/services and this might take customers and their servicing into a different orbit. These startups may be very nimble but can quickly disrupt the market by offering innovative and competitive products and acquire good market share. So the whole idea is to benefit the customer with innovative and competitive products.

For example, the current Home Loan Product may not be innovative and bank may not have thought any innovation in the last decade. The startups who gets customer loan data, subject to approval from customer might offer an altogether different and innovative loan product linking monthly pricing with monthly repayment. Every month the price may drop by “x” points/percentage subject to customer repaying installments on time. This might bring in a complete revolution in the offering to the customers.

It is estimated that 38% of bank customers would leave their bank if another provider/competitor offers a better product/service/price.

(Source - https://www.gemalto.com/financial/ebanking/psd2/open-banking)

Let us look at few advantages and challenges of data sharing/opening up by banks:

Advantages:

• This ripple would bring in lot of competition and innovation in the market.
• This will force Banks to think, innovate and offer competitive products and services to the customers.
• The startups who are eager to grab their share will try to offer the best and innovative product to the customer
• Banks can levy fees for sharing of data and increase their fee based income.
• Banks will be forced to bring in digitization in their offerings to reduce the cost.
• Since the data will be opened up for third parties, payment processing would be simplified
• The data will be shared by all banks over a period of time and with this initiative the customer might see all his account details in one place, at the same time
• Since the data will be shared by Banks for example their income and expenditure details, customer need not worry about providing these details while applying for a loan. The data which is already shared by banks can be used by startups while apprising the loan.
• The customer will benefit out of this and choose the most competitive product. This could be interest, fees, service related etc.,
• This initiative will up the banks investment in the right areas of core replacement and digitization, which will pave a long way for development of the banks.

Challenges:

• Data has to be shared in a very structured, secured manner after receiving the consent from the customer
• Banks needs to have/build open APIs to open up/share banking data
• Banks software has to be compatible to share/open up the data.
• Banks should build the necessary infrastructure to share/open up specific data which has been approved for sharing, by the customer.
• The data could be shared through an intermediary or directly with the startups. Hence banks have to build their infrastructure and allocate budgets accordingly.
• Banks overall cost might be higher when compared to the startups and may be not able to compete with them
• Customer attrition may go up and may force banks to give us some business
• The startups may offer innovative products initially but over a period of time might fail.
• The startups may share/sell the data with their partners and thereby customer’s sensitive data could be misused, without consent of the customer.
• Banks may not be keen to share the data, hence they could find ways and means to delay sharing/opening up the data. 

A view of how data could be shared/opened up by Banks using Open APIs

Image Source : http://zanders.eu/en/wp-content/uploads/sites/2/2016/01/Figure_1_Open_banking.jpg

While there are many challenges around opening up/sharing data, the regulator has to bring in tight regulations and put proper checks and controls in place and balance the entire game. It has to be done in a phased manner by selecting some specific banks and specific states etc., and then roll it over other banks/countries/states. In case an intermediary is involved in between Bank’s and the startups/Organisations to whom the data would be shared, then the intermediary needs to have the necessary infrastructure to receive, share, keep proper audit of the information received/shared etc., The regulator has to screen the startups properly before registering with them/intermediary. The rules for sharing/restricting data sharing further by the startups have to laid down clearly.

While there is lot of data such as customer details, address, contact, preferences, financials, dependent details, transaction information, available balance, term deposits, loan related information, Trade finance details, credit card, investments, utility bills paid etc., there has to be clear guidelines from the regulator in terms what kind of data has to be shared/opened up. The entire table information may not need to be shared. It is very critical for the regulator to draw the thin line to decide what has to be shared/opened up and what would remain confidential to the Bank. There are certain aspects for example available balance, average balance for operative accounts which are very sensitive and if proper checks and controls are not put in place, the data may be misused and result in frauds.

The regulators have to bring in stringent policy to penalize the respective parties ( Banks/Startups/Intermediary organization) if there is any breach/lapse in sharing data. As customer data is very sensitive, stringent policies have to designed in such a way that the respective organization may have to lose their license for sharing of data without customer consent or if there is any misuse of data.

Good news is that 80% of the Bankers feel that open banking is not a threat for them and they are looking forward to use this as an opportunity to increase their market share.

(Source - https://ibsintelligence.com/ibs-journal/80-of-bankers-see-open-banking-as-an-opportunity-not-a-threat/)

It is not a long way that this regulation/mandate would be spread across other countries and it is high time that banks gear up themselves and be ready to face the storm.