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Open Banking and Beyond

According to the Economist Intelligence Unit (EIU) report: A whole new world: How technology is driving the evolution of intelligent banking, respondents cite open banking as the top strategic priority by 2025. 41% of respondents also consider acting as a true digital eco-system as well as a hybrid model of aggregating third-party products in addition to providing their own, as the primary business models of the future. Both of these are classic open banking platform models that we are already seeing today where banks collaborate with third-party manufacturers and distributors to provide services to their own and others’ customers. Respondents also see the biggest competition coming from technology and ecommerce disrupters and from partnerships between these giants and fintechs by 2025 rather than from payment providers or P2P lenders or fintechs on their own.

This is in line with what we observe in the industry today. The Chinese giants, for example, WeChat and AliBaba are already offering a choice of financial services on their platforms through the use of Open APIs.

From a regulatory point of view, open banking has received a big boost over the past year across the world. In over half of the 36 markets globally where open banking has or is in the process of being adopted, it is the regulators that are actively promoting competition and innovation while at the same time, driving API, digital identity and security standards. In other words, they are encouraging open banking initiatives, both directly and indirectly. Europe’s PSD2 was the pioneering initiative. This along with its own open banking framework introduced by the Competition and Markets Authority made the UK one of the first markets to mandate open banking for nine leading banks (CMA9). In Australia, the government’s open banking initiative mandates the four major banks to make banking data available to TPPs (third-party providers) by June 2019. The monetary authorities in Singapore and Hong Kong have been aggressively driving Open API standards in recent months. Canada is expecting to see similar initiatives with the Canadian Bankers’ Association focusing on digital identity as a precursor to an open banking framework.

However, if we look at the more mature markets, the reality is that open banking adoption by incumbent banks has been slow despite all the hype. On the technological capability side, banks are not finding it easy. In the UK, four of the CMA9 banks missed the January 2019 deadline. A report[1] on the performance of the open banking APIs in the UK revealed that several banks are failing to deliver adequate service quality levels to consumers for the mandated APIs such as availability and latency. The challenges of legacy infrastructures were noted in the report.. Consumer awareness and apathy are another factor. In the UK, in January 2019, one year from the launch, 58% of respondents in a Yougov survey still did not know what open banking meant.  Privacy and security concer also play a role, with the disillusionment caused by recent incidents at Facebooks, Google and other technology giants in this area.

Luckily for banks, they are still more trusted than third parties. Those consumers who were made aware of open banking in the same Yougov survey in the UK, categorically said that they would trust banks above new entrants in keeping their personal and financial data secure. By end of 2019, the CMA9 had gained 1 million customers, doubling in the previous six months. Third party service providers have also doubled with 204 regulated providers now, up from 100 at the end of 2018, according to the Open Banking Implementation Entity.

Hence, in order to make a success of open banking, incumbent banks need to make consumers aware of the concrete benefits of open banking, while assuring them of the safety of their data. The key question they must address: how does open banking create greater choice and control over what consumers buy and from whom; how it provides increased convenience, targeted advice, transparency, personalized products at lower cost.

At Temenos, we are seeing many of our clients starting to implement open banking successfully. Many have launched API marketplaces, initially aimed at third party developers that were oversubscribed within weeks of launch; one incumbent bank has launched an aggregator multi-bank PFM app in their home country, several digital challengers are exploiting open APIs to provide real value-add to their customers in terms of ease of payment or new services.

In the end, open banking will be deemed a success only when it is able to drive a consumer-centric revolution of sorts in financial services i.e. helping launch banking innovations that are intrinsically based on interconnectivity of data and services from multiple eco-system players that become mainstream and make a tangible difference to the everyday lives of end-users.

[1] UK Open Banking APIs Performance Analysis: 2018 by Finextra and APIMetrics


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