What is open banking and why does it matter?

There was a time, not too long ago, when banking and banks were inseparable. Banks were the storehouse of trust, keeping our money safe. With the advent of internet, banks started to offer services online, making a visit to the bank branch less frequent. Basic information like checking of account balance, making a transfer, paying bills became convenient with internet banking. With the explosion in smartphone penetration, these services moved to mobile as well.

After the API technology came of age, many banks started moving to API banking; but these were internal APIs being consumed by proprietary apps on the mobile and the internet. This was a great step forward, but there were still a few pieces missing in this journey. Customers having multiple bank accounts faced a challenge of aggregation. Price discovery among banks was an issue. Customers felt a lack of greater choice and greater freedom. In many cases, they felt captivated inside the poorly designed apps of the banks. As long as banks had control on the transaction data, solutions to these problems were difficult to achieve. So, will opening up the banks help?

Opening up of banks is nothing but opening up their APIs. Understanding APIs will help us appreciate the benefits and threats of open banking.

API stands for Application Programming Interface. APIs are like connectors used to integrate data from a source into an application. Imagine you are in a restaurant as the diner (user). The restaurant has a cook (software). Your order needs to reach the cook and the actual food needs to be returned. The connector between you and the cook is the waiter, the equivalent of an API. The waiter passes your request to the cook and after some time, returns with the food.

The API economy is well established. An easy example here would be booking a flight using Makemytrip or Goibibo. You tell the site where you want to go, when you want to go, when you’d be coming back, cabin and seat preferences. None of these sites have access to the airlines’ databases. They interact with the airlines’ APIs and return the results for your request.

Digitally signing into a website using your Facebook or Google credentials is another example of APIs. All strong brands like Amazon, Netflix, Uber, Visa, BBC and countless others are running APIs and connecting with numerous services.

Let’s return to open banking.

Open banking is the re-imagination of digital banking and creating new digital ecosystems through APIs provided by banks. Imagine that you can use an app, not from your bank, but from a third party which allows you to manage your expenses seamlessly, advices you on how you can save across all your bank accounts and how you can best invest towards your financial goals. All this without any security concerns and putting the control in your hands.

What is the open banking opportunity?

When banks start opening their APIs to trusted third parties, it breaks their monopoly over data. Open banking can unlock new opportunities and revenue streams. A significant number of technology companies are waiting to leverage banking resources. Customers are looking for context based solutions, be it in expense management, payments or lending. Customers in traditionally under served markets will be able to get sustainable service.

Third party innovation is key to this trend. ‘Build a better mousetrap and the world will beat a path to your door’ attitude will not work in this new world. We must let go of the control on innovation and start thinking outside in. A robust partner-developer ecosystem is required to develop the right APIs which can be leveraged to create differentiation and value for the customer.

What kind of business models are likely to emerge?

The most basic use case is price comparisons of products in both liabilities and assets. But these will not be game changers. Let’s do some crystal ball gazing here. Building a bank from modules from third parties is going to emerge. Banks will start complementing their offerings with those from third parties. Innovative personal finance management solutions will become commonplace. Apps will ping customers when they are spending too much on movies or shoes, or offer them a one-click option to put unspent income into a Mutual Fund aligned with the risk profile. Analytical tools will aggregate data from multiple sources to offer the best loan. It is possible that a single banking app of today will morph into hundreds of apps sitting on open banking platforms. To be successful in this era, banks will need to keep an open mind to work with one or more of these models; and a collaborative mindset.

Data protection - the gorilla in the room

Naturally, innovations at such massive scale come with their warning signs. There are inherent risks to privacy and sharing data. To deal with these, strong regulatory directives and governance will be required and implemented by all stakeholders. This is not as simple as this article may lead you to believe. There are formidable challenges in developing the infrastructure. Banks have done a great job of protecting data so far. But in a data sharing world, permissions will be required, audit trails need to be kept and new sets of regulations need to be followed. New state-of-the-art security standards will require implementation. Product design and transparency rules will change and will become even more important. The biggest challenge will be to educate customers, which will take time, effort and money. Finally, regulators must be ruthless in withdrawing the licences of third parties that violate or flout any rule. 

Many countries are various stages of evolution. India experienced a massive growth in the use of digital money after the controversial demonetization with a shot in the arm to the mobile wallets (which are in a consolidation stage now). The Monetary Authority of Singapore has supported a build out of a large fintech market on the back of APIs. But, by far the most structured approach has been taken by the European Union in the form of the Payment Services Directive (PSD2).

Regardless of how the regulations evolve in various countries, the open banking trend is here to stay. Increased competition will lead to revenue pressure for banks. Change is rarely comfortable. It is imperative on the banks to try and stay ahead of the curve rather than wage a futile battle to stop the trend.

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About the author

Anindya Karmakar has led multiple initiatives at the cutting edge of digital connectivity, IoT, robotics, analytics, paperless branch and remote advisory. He is passionate about the digital revolution which is underway. He simplifies and de-clutters digital jargons and concepts and presents them in layman's language.

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The views and opinions expressed or implied herein are my own and do not reflect those of my employer, who shall not be liable for any action that may result as a consequence of my views and opinions. The pictures used have been taken from the open internet and I don't claim any credit for them.