The Bank Is Open For Business
This week, Australian bank Macquarie announced the launch of its Open Banking platform, joining the ranks of financial institutions with similar initiatives. So what’s the fuss about?
As the term suggests, Open Banking believes in democratizing access to banking data, and making it available in real-time to customers so that they can manage their finances better. Open Banking relies extensively on the use of Application Programming Interfaces (API) to securely share customer data among banks, as well as allow third party developers to access the bank’s technology environment to build innovative applications and services. But above all, Open Banking marks a significant shift in banking structures, as it forces monolithic, universal banking institutions to make way for a collaborative ecosystem of financial providers.
Unlike most business trends, which feed off consumer, technology or competitive changes, Open Banking draws its momentum from regulation and governmental drive. Examples include the Payment Services Directive 2 (PSD2) in Europe, the Open Banking Working Group in the United Kingdom, the Unified Payments Interface (UPI) in India, and the Open Banking regime in Australia.
Faced with a deadline to open up their customer data, banks around the world are scrambling to get their act together. A big part of this process involves transitioning from a pipeline model of business – where the bank creates, owns, and distributes its products and services on its own – to a platform model, where it acts as an aggregator of the best financial products and services available in its market. In doing so, the bank is able to offer customers, products and services that are in their best interest (not necessarily from its own stable), to create maximum value for all concerned.
Typically, a bank can go from the pipeline to the platform model using any or a combination of the following strategies:
Embed services in an application chosen by the customer
The most popular strategy is to use APIs to expose various banking services that corporate and small business clients, or even third parties such as FinTechs can pick, choose and structure as required. This presents a challenge to the bank, which must now find a way to embed its services in the users’ applications, form factors, and business processes to enable them to add value to their customers. A number of banks, including BBVA, Barclays, Citibank, and Deutsche Bank are setting up API stores/ marketplaces and development centers for this purpose.
Join an established ecosystem
With tech giants emerging as a force to reckon with in the payments space, it makes sense for banks to be part of an ecosystem led by Apple Pay, Amazon Pay or PayPal. While this decision is voluntary, banks may also be required by law to join other ecosystems, such as the Unified Payments Interface in India.
Take the lead in curating an ecosystem
Several banks have taken the initiative to build their own Open Banking ecosystems. Recently, seven banks in Singapore came together to create PayNow, a money transfer facility that only needs a mobile number or National Registration Identity Card (NRIC) to work. HSBC has its HSBC Connections Hub, a social network that business customers can use to connect with other HSBC customers worldwide. Last year, Deutsche Bank pioneered a digital platform for SME clients where they could access benchmarking, business intelligence, credit monitoring, and trade information tools. And in October 2016, ICICI Bank and Emirates NBD, one of the largest banking groups in the Middle East piloted a Blockchain-based network for international remittances.
Provide banking as a service
FinTech firms and startups are key actors in the banking ecosystem. Actually, no platform strategy is complete without their participation. This is why many banks are seeking to combine their strengths with those of FinTech companies and neo banks to create a banking offering. In this symbiotic arrangement, the younger partner relies on a licensed bank for basic banking components, such as technology stack, operations, network connections and compliance, all of which the latter offers as a service, on top of which the FinTech firm builds new customer experiences and value propositions. The Moven-CBW combine, and Fidor Bank’s tie-up with telecom company O2 are examples of this.
Open or ecosystem banking will benefit customers by expanding their product options, and financial service providers by expanding their reach. But there are a few hurdles along the way. At present, each bank defines its APIs differently, which hampers integration and interoperability, and generally defeats the whole purpose of Open Banking. Bodies, such as BIAN (Banking Industry Architecture Network), are working hard to remedy this situation by formulating clear, standardized definitions for various banking APIs. Infosys is also helping banks transition to a platform model by offering a broad selection of open APIs and applications, facilitating engagement with FinTech firms, building an applications marketplace, as well as creating a core banking-agnostic omni-channel hub through which banks can distribute their own and third party partner products.