Open Banking

Open banking is a mechanism wherein a bank allows customers to access its services and data externally from an application, not provided by the bank via APIs (Application Programming Interface).

The objective of open banking is to allow customers access to banking services from applications that they use day to day – which is a key ask for “Lifestyle Banking”. As part of this, the financial services are made available in financial as well as non financial applications. Payment in Uber is a classic example of this.

Open Banking also promotes competition by reducing information asymmetry between different players in the eco system.

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Services Offered

All banking services are not provided through Open Banking APIs. Example - changing customer demographic data (typically change of email id, mobile number, address), changing nomination etc are typically not provided through Open Banking. For these services, you either need to use the self service channels provided by the banks or visit the branch. However, the services offered via Open Banking are what the customers require on a day to day basis.

The services offered under Open Banking can be divided into two broad categories:

1. Payment Services: This allows the customer to transfer money to another account within the same bank or to some other bank without logging into the self service channels of the bank.
2. Account Details Services: This allows the caller to get details on the accounts – like transaction details.

Another area that is being talked about, but has not taken off fully is account portability – allowing the customer to move the account from one bank to another seamlessly. There are various flavors of this – keeping the account number same, retaining account transaction history, retaining the standing instructions on the accounts etc.?

Payment Services

Traditionally the form of payments was restricted primarily to cards (credit / debit cards) and cash. The transaction cost in case of cards is very high. Cash handling cost is also significant. A new form of payments is coming up in the form of real time payments directly from the bank account. The associated transaction costs are very low (zero in some countries) as well as settlement is instantaneous.

Open Banking allows the bank to offer payment services via APIs. The APIs are embedded in the various applications providing seamless checkout experience to the customers. Uber popularized this trend and it is now common for other applications also to provide an equally seamless experience. Payment services via API has gone from the electronic (read e-commerce) world to the physical world as well. Merchants now display QR codes which can be scanned to effect an immediate payment.

Open Banking is really what has made lifestyle banking (see article – Evolution of CBS ) possible.

Account Details Services

The customer transactions data is owned by the customer. However, the bank which provides the account has access to this data and it mines the data to offer more products to the customer – thus deepening the relationship of the customer with the bank. Though the data is owned by the customer, only the bank providing the account services is benefiting from it (other than the benefits associated with the new product sold by the bank to the customer).

Open banking allows seamless sharing of the data to other banks / financial service providers so that they can give better service to the customer. This was possible earlier as well – however, this used traditional means like sharing of statements. This was not only cumbersome to the customer, but the receiving financial institution also had to validate authenticity of the statement. This limited the speed at which the data was shared and used – effectively making the option as not viable in a number of use cases.

With open banking, the power to use of the data moves to the customer. Now the customer can benefit from the data by getting better services. A few examples of this:

1. By sharing the bank statements via open banking to other financial institutions, the customer can get real time offers on loans that he may be looking for. He can compare the offers from various lenders and decide which is most suitable for him.
2. The customer can share the account statements to a spend analyzer application which can provide the categorization of spends as well as tracking against budget. Here the data is shared periodically by the bank to the service provider.

This is true democratization of data – where the customer who owns the data is also able to “monetize” the data in the form of getting better service / offers.

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Security Aspects

Since sensitive personal data is being shared by the bank to external entities, security is a key consideration while providing open banking services.

While doing payments, there has to be an authentication mechanism by the account provider as the final onus of security lies with the account provider.

For data sharing, consent needs to be taken from the customer. The consent needs to address the following key areas:

1. What kind of data to be shared (example transaction data for the last 6 months, balance data, account ownership details) and with whom.
2. What can the data be used for.
3. How long can the data be retained.
4. Is the data sharing one time or on a periodic basis. If on a periodic basis, what is the frequency and for what period does this data have to be shared.
5. Date by which the shared data has to be destroyed.

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The customer should have the right to revoke the consent at any point of time.

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How are Open Banking standards evolving

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The two main approaches being taken by countries are:

1. Regulation driven – here the regulator defines the specifications and makes it mandatory for information holders (banks and other financial institutions) to implement the specifications.
2. Market evolution – here the regulator does not specify anything. The market evolves via partnership / informal agreements between banks and other financial institutions.

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Countries where the standards are regulation driven are moving at a much faster pace as against counties which are leaving this to market evolution. Some of the countries which are using the regulation driven approach are:

1. Australia: The approach is much more wide ranging and not restricted to banks. Regulators have come up with Consumer Data Rights (CDR) which is being implemented in phases – starting 2020. Initial phases focus on data rights in banking sector including all types of products – liability, asset, lines of credit.
2. Brazil: The central bank has come out with a phased implementation plan for Open Banking which completed in 2021. The scope includes mortgages, savings, pensions, insurance and credit.
3. Europe: The open banking initiatives started primarily in Europe and they have made significant progress in this area. Talks of open banking started in 2015 with the formal launch in 2018. Since then the specifications continue to evolve as well as grow. The rollout of Open Banking is being reviewed as part of NextGenPSD2 initiatives to see what can be done to further improve upon the framework.
4. India: India started the journey with biometric ID for its citizens (AADHAAR) in 2010. This was followed by API based real time payments (via UPI) in 2016. The latest initiatives in open banking arena are Open Credit Enablement Network (OCEN) in 2020 and Account Aggregators in 2021.
5. Singapore: Most countries are focusing on Open Banking standards at a country level. Singapore has gone beyond country level and has launched API specifications at region level – called APIX (API Exchange) via ASEAN Financial Innovation Network (AFIN). AFIN is a collaboration between ASEAN Bankers Association (ASA), International Finance Corporation (IFC) – a member of World Bank group and Monetary Authority of Singapore (MAS). This started in 2018 and the list of institutions providing implementations of these APIs are increasing rapidly.
6. UK: Started with the initiatives as part of EU and continues to evolve at the same pace as Europe.

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Use Cases for Open Banking

The use cases for open banking are numerous and evolving. Some of the use cases are enumerated below:

1. Instant payments: This is by far the most common use case. Here, the customer initiates payment from a non banking application or even from a physical store. In eCommerce world this is a form of embedded finance. Uber payments, Google Pay are examples of this.
2. Personal Finance Management / Budgeting and Expense Management: The service provider uses Open Banking to pull transaction data from accounts (demand deposit, credit cards) of the customer from different banks / account providers. It classifies the data and provides insights into spends and how the customer can optimize the same. Tracking against budget is also an extended area of the same. In earlier times, screen scraping was used for this. This was error prone and also posed a security risk as the customer had to share this banking password with the screen scraping solution. With Open Banking, this moves to a consent based data sharing.
3. Instant verification of account details: Earlier penny drop was used to check validity of an account. Open Banking provides an easier and faster approach for this.
4. Instant / faster credit origination life cycle: Based on consent from customer, potential lenders can pull account transaction data from various financial institutions and make real time decisioning on credit origination. With open banking also providing customer onboarding, coupled with eKYC, instant credit origination can be done for new to bank customers also.
5. Tracking of potential financial stress on accounts: Some of the lenders are also taking permission to pull transaction data of customer during the entire loan term. This data can be used to detect early signs of stress on the account.
6. Product recommendations: Open Banking also allows for pulling product services data from banks. This coupled with the customer transaction data can be used to give product recommendations to the customer. Imagine an equivalent of Google flights for taking a banking loan or opening a demand deposit account - all banks / providers will give quote to the customer and customer can take a call on which provider to go with.

Open Banking opens up the market for totally new type of players who will pull data from various banks and provide services like – comparison of loan offer across banks, product recommendations across banks.

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Like APIs across airlines / hotels provided services where we can compare the offering of various airlines / hotels and then take a call, Open Banking is doing the same for financial services

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Open Banking – FYNDNA view?

Imagine there being no standard for electrical sockets within a country. The scenario is nightmarish – both to the producers of appliances (which types of plugs should they use?) as well as the consumers (which type of sockets they should provider for in their houses?). Fortunately, the sockets have got standardized – atleast at country level.?

The way Open Banking is evolving is exactly on same lines as electrical sockets – which are standards at a country level. This allows easy integration between service providers (banks) and consumers of the services (other banks / fintechs). Recent initiatives like APIX in Singapore are attempting a regional standard – would be interesting to see how it evolves.

Countries using the regulatory approach for open banking have made significantly more progress than countries which are dependent on market forces. Open Banking is accelerating the adoption of “Banking as a service”. In countries where the open banking standards are maturing, we are seeing significant innovation.

The launch of Account Aggregator and OCEN framework in India is a significant step in Open Banking. We feel that this can be the next big disruptive force in India – possibly on lines similar to UPI.?

The traditional solutions in the banking space have added the API layer as an add-on to the existing solutions. At FYNDNA, we are taking an API first approach. This combined with cloud native micro services architecture will provide a solution to banks which will be scalable based on the needs of the specific bank.

Links to Open Banking Specifications

Australia: https://www.cdr.gov.au/

Brazil: https://www.bcb.gov.br/en/financialstability/open_banking

Europe: https://www.berlin-group.org/psd2-access-to-bank-accounts

India – Account Aggregators: https://sahamati.org.in/

India – OCEN: https://github.com/iSPIRT/OCEN

Singapore: https://www.mas.gov.sg/development/fintech/financial-industry-api-register

UK: https://www.openbanking.org.uk/

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Manish Gupta

Co-Founder, FYNDNA