Open Banking: Slow off the blocks, but heading in your direction
Banks around the world are using Open Banking to change the way they do business. It’s more than simply responding to regulation and it’s much more than just a European issue. We believe that the way banks respond to Open Banking will significantly impact their competitive position over the next five years.
Open Banking promises access to customer data for third parties, such as FinTechs, challenger banks, tech giants and non-banking businesses, ranging from data aggregation to instructing payments. The technological glue that brings all these different groups together is open APIs (application programming interface).
A key goal of Open Banking is to be compliant with the Second Payments Service Directive (PSD2), but banks can extend their API development beyond the minimum regulatory requirements to offer existing customers new services.
However, it is significant that although PSD2 came into force in January 2018, six of the nine largest UK banks were not ready – despite warnings. Five asked for an extension and one missed the deadline completely. What can we learn from this?
PSD2 leaves open the API details that third parties will use to connect with banks. According to Accenture, the European Banking Authority’s draft Regulatory Technical Standards for PSD2 specifies only technical framework conditions and no interface standard. To help fill this gap, various groups are working on defining standards, such as the Berlin Group, France’s STET and the UK Open Banking Implementation Entity. The European Fintech Alliance has raised concerns that banks will deliberately minimise API functionality to constrain third parties. Banks must have dedicated third-party interface specifications and testing facilities ready by March 2019.
Developing and opening APIs will give banks the opportunity to adopt cloud-based solutions, enabling them to operate a more streamlined and cost-effective model. However, banks operating on a legacy architecture will struggle to compete in an API environment. They need to untangle old infrastructure before they can even think of opening their systems to newcomers. In a recent BIAN survey with banks, over 60% expressed concerns that they will struggle to open up their APIs, as regulation requires, because of the “current state of banks’ core architecture”. Avanade has recently developed a CIO Guide to support banks wanting to modernize their business.
Creating an innovation ecosystem
For Open Banking, managing – or more accurately, engaging – with third parties will be a new experience for banks. Collaboration is crucial. This goes way beyond vendor management. Setting up ecosystems of innovation with FinTechs, challenger banks, tech giants and other sectors (such as retail, telco or travel, for example) will require a different approach. Also, setting up sandboxes and developer portals is a helpful step, but these require marketing to the developer community, along with the provision of open source development tools, for them to be truly successful. BBVA and ING in Europe, Citi and Capital One in the US and DBS in Singapore are the exceptions that prove the rule here. Overall take-up of Open Banking in Europe has been slow, but it will gain momentum. Certainly, the business drivers behind it are leading to greater take-up in other parts of the globe, as we shall see in the next blog.