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Open Banking APIs: How open should we be to Open Banking?

Evidently, there are more and more innovative FinTech startups as well as banks and insurance companies changing the industry landscape by providing new and easy to use applications and solutions. However, there is one problem that is preventing this revolution moving to the next level and that is they all use their own specific interfaces for their data and information.

Open Banking seeks to change this by establishing common application program interfaces (APIs) layer, which ensures a uniform and consistent way for managing information exchange throughout the industry. In this article, we explore the Open Banking APIs concept more closely and in doing so we address what it actually means for banks and more importantly, what it means for the bank’s customers.

                                                                                            

What is Open Banking APIs?

Under the revised Payment Services Directive, also known as PSD2, European banks are required to provide communication interfaces to Third Party Providers (TPPs). These interfaces generally referred to as APIs, will permit banks to provide communication interfaces to TPPs, so that these companies can have access to data about the bank’s customers, initiate financial transactions, and consult the transaction history of the customer. The idea being that in doing so this will allow TPPs to build innovative financial services on top of the services of the banks, with the aim to improve competition and innovations in the banking industry. The requirements for these interfaces are outlined in the Regulatory Technical Standards (RTS) on Strong Customer Authentication (SCA) and Common and Secure Communication (CSC).

 

What does this mean for the banks?

Banks are required to provide an online communication interface that allows TPPs to identify themselves to the bank, in order to request and receive information about bank accounts and financial transactions of customers of the bank, and to initiate a financial transaction from an account of a customer of the bank.

Thus, to date there have been solo structures within banking, which have been very product centric for all the wrong reasons and for far too long. The product centric has been all about mass marketing and providing not very sophisticated products with very little consideration of the end user. Open Banking allows banks to move away from this by allowing more focus towards service and more importantly delivering not mass market products but well thought out unique products through innovation. Hence, banks will be known more as brands as opposed to banks, under this new concept.

 

What does it mean for the customers?

Open Banking will allow individuals and businesses to use transactional data to access and compare products more easily. Note the key to success is the ability to combine new sources of open and shared data with traditional data sources in a seamless digital journey.  In doing so, this will transform the way customers apply for credit and other products, enabling individuals and businesses share the bank transaction data seamlessly and securely online without having to fill-out paper work, scan their data and provide information manually repeatedly. 

As such, Open Banking promises to unlock innovation that will profoundly transform and improve the banking experience of consumers, and that will bring new financial services to consumers. For instance, TPPs will provide applications allowing consumers to consult multiple bank accounts from a single application and look for a mortgage more easily, allowing banks to find customers matched to a new product, and allowing businesses to share data more easily with their accountants.

The Banking industry has had several API standards and API data protocols developed over the past decades and couple of which have been updated and improved recently, examples include FicTS, ebics, Open Financial Exchange just to mention few. However, this is not to say banking industry has fully embraced the Open Banking concept and in fact, it is fair to say it is only at its embryo stage and much work is still do.

 

What are the challenges?

Recent research conducted by YouGov revealed that close to three quarters (72%) of UK adults have not heard of ‘open banking’, while just one in three (28%) are aware of it. Surprisingly the research further revealed that, it is those in the older age groups that are more likely to be aware. Close to four in ten (39%) of those aged 55+ have heard of open banking, against just 14% of those aged 18-24.

It is surprising that the older generation is more aware of open banking, as we may expect a younger, more tech savvy audience to be interested in the ground-breaking products and services. The reality may be that true innovation is yet to take place and the products and services currently available are not really considered necessary.

Nervousness about sharing data is a barrier. Over three quarters (77%) said they would be concerned about sharing their financial data with companies other than their main bank, whilst just 6% would not be concerned and the remaining 16% said they were not too sure. Just 12% state that they would be prepared to share their financial data in order to access new and innovative products or services. The figures clearly point that the general public can only understand the impact of Open Banking once they know about it and understand it - the introduction of open banking was hailed as a revolution for the financial sector, however what we’re actually seeing is more of a slow and silent evolution. More needs to be done to allay consumers’ fears about data security whilst financial service providers will also need to ensure that there are real benefits for consumers who are prepared to share their data in this way.

With such low levels of understanding about what Open Banking is, it’s perhaps unsurprising that Britons are unsure about the impact the service will have.

In order for the consumers to fully embrace this concept of Open Banking, there needs to be more effort made towards educating the end user to why Open Banking is a good thing. Educating in simple terms of why and how they will benefit by allowing their data to be shared with TPPS. Governments and the regulators need to take stronger stance on this by addressing the questions and concerns around security, privacy and how data will be protected from hackers, scoundrels and corporations. Where these unfortunate events do occur, what will the consequences be for the criminals and how the consumers will be protected-regulators must clearly spell out the measures they are putting in place.

Additionally, it is not just the concern around making much greater efforts in educating the consumers about Open Banking but equally if not more pressing is the issue around negative reputation the banking industry has had; especially since the financial crisis which although occurred over a decade ago, is still at the forefront of consumer perception when it comes to banking. Recent and ongoing negative headlines around banking scandals, only adds to this concern- therefore, building consumer trust is of utmost importance.  

 

Conclusion

Security is utmost critical for the success of this endeavor and building consumer trust is equally as important. Fears around sharing financial data and existing satisfaction of banks can be barriers to growth and innovation.

Nevertheless, it is apparent Open Banking will allow for rapid and effortless expansion of services, which will not only benefit the banking industry itself but also, benefit the customer who can reap the benefits of innovation as result of greater competition within the market place. Therefore, coming back to my original question ‘how open should we as as customers be to Open Banking, ‘ the answer is obvious  we should be open to Open Banking however, the prerequisite would be to educate the general public about what Open Banking really entails.

As Henry Ford once famously said ““If he had asked consumer what they had wanted, they would have said a faster horse.” He raised a valid point – sometimes people do not know what they want and it requires some serious thinking ‘outside of the box’ to create incredible ideas that will change the world. Open Banking is this in essence, as it creates an opportunity to provide products to the end user they may have not thought of but once they have them they cannot live without them!

 

 

 

 

 

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Comments: (1)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 09 April, 2019, 13:39Be the first to give this comment the thumbs up 0 likes

IMO, driving awareness, innovation, compelling apps, and so on are too little, too late for Open Banking. MINT et al have attempted all these things for over a decade and have only achieved tepid offtake of their PFM / MoMMA apps. I strongly doubt if a mere change in the data access mechanism from scraping to API will lead to a sensational increase in the offtake of Open Banking apps.  

IMO, as I highlighted in Open Banking Needs A Blockchain Boost, the only way to bolster Open Banking is for TPPs to pay for customer's banking data and then do all the innovative things on top of it. 

Saleha Anwar

Saleha Anwar

Independent Business Consultant

Finance

Member since

13 Nov 2017

Location

London

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This post is from a series of posts in the group:

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