Open banking — lessons, challenges and paths forward for new banking services
Depending on your viewpoint, open banking will:
A) Lead to the introduction of numerous new financial services, enabling consumers to better manage their finances and contributing to massive growth of the financial services industry.
B) Be a security and privacy nightmare, forcing banks to open their long-established processes to new fly-by-night operations that add little value.
As with many topics, the answer might not be so black and white. There are numerous fintech opportunities that new integrations can speed to market. There are also numerous concerns about how best to open up existing banking relationships to ensure that sensitive financial data is handled correctly. How the set of technologies will disrupt financial services and introduce more competition is still to be determined.
The current reality of open banking involves creating regulatory and technology frameworks that balance the opportunities with the risks, the enthusiasm of the new upstarts with the steady hand of established players. Let’s examine the different interests and understand what is working and what needs work to make open banking valuable to all stakeholders.
Open Banking vs open banking
Open Banking refers to a specific U.K. organization authorized by the Competition and Markets Authority on behalf of the U.K. government. The broader use of the term open banking refers to the set of laws, technical specifications and implementations around the world to improve the secure sharing of customer financial information, with full approval by the customer. While the U.K. is often considered to be at the forefront of open banking, in this context we’ll be referring to the broader term, not the U.K.-specific example.
The driving force for the introduction of open banking was the Second Payment Services Directive (PSD2) in the EU. That directive came into effect on January 12, 2018 and required banks to open up access to customer accounts, allowing third-party providers to access that information via APIs (application programming interfaces).
There are two designated open banking categories under PSD2:
- PISP (Payment Initiation Service Provider)
- AISP (Account Information Service Provider)
PISPs initiate payments on behalf of a user. On the other hand, AISPs offer users a consolidated view of their accounts with different banks. While AISPs could analyze a user’s spending habits, PISPs deal with the actual transfer of money in the form of peer-to-peer (P2P) transfers or bill payments.
Now, open banking initiatives are in place, or coming soon, to multiple jurisdictions around the world. While each country is approaching open banking differently, the goals are the same: to create more innovation in financial services, provide more options for consumers and speed up adoption of digital banking.
Open banking at year two
For many in the industry, open banking is a game changer. According to John Stecher, chief innovation officer at Barclays, “open banking is one of the most transformational things that has happened in the industry, especially in the retail space.”
However, for the public, uptake has not been quick. After the first year of open banking in the U.K., a Financial Times survey found that only 25 percent of the public had heard of that term and, of those, only 20 percent knew what it meant. In other words, only 5 percent of the U.K. public even knew what open banking was.
In the year since then, public perception has grown. Over 1 million people in the U.K. now use open banking technology, the number of financial service providers participating has doubled to over 200 and there are over 200 million API calls each month. Open Banking Implementation Entity (OBIE) trustee Imran Gulamhuseinwala states, “we believe 2020 will be the year when adoption of open banking financial services really takes off.”
The contrarian view is that open banking was oversold, implementation is slow and large banks are dragging their feet on mandated integration. Six banks needed extensions on the initial deadline, and last year five banks again missed deadlines. The technology many banks are still deploying is screen scraping, which is outdated and requires extra steps by the consumer. Notes Sarah Kocianski, of financial technology consultancy 11:FS, “it’s probably been quite painful for the big banks. It’s been very frustrating for the fintechs.”
Open banking in progress
Even with the delays, lack of integrations and public awareness, the innovators and fintech entrepreneurs still deeply support open banking initiatives. There are 11,000 developers and 250 APIs listed on the Open Banking Project. In an Open Banking World Series report from Nuapay, 79 percent of the 100 senior finance, payments and product professionals said that they were certain their company is planning to use open banking services and are ready to do so.
While consumers might not know a lot about open banking, they don’t really need to know about the technology; what consumers care about is having a better experience, simplifying their payments and accessing better financial services. As Sulabh Agarwal, a managing director at Accenture, puts it in the Telegraph article quoted above, “a normal person on the street doesn’t know or care about open banking … but if you say to them it will fill your tax based on your banking data, they’ll like it. They don’t need to know that there’s open banking behind it.”
Lessons for implementing open banking
While it’s only been two years, many lessons are noticeable for other regulators, banks and fintech companies as they pursue their own open banking initiatives:
- Reasonable time frame
Implementing “transformational” changes to complex financial systems with numerous stakeholders is not something that should be done on an aggressive schedule. Taking time to coordinate and implement all the various dynamic elements will allow rollout to be smoother and more accepted.
- Enable synergies of open platforms
There are already a plethora of APIs and fintech solutions ready to go and proven to work. Encouraging acceptance of open technologies speeds up adoption and allows the advantages of open architectures to better flourish.
- Encourage competitive flexibility
The model of financial silos with limited, set offerings is becoming outdated. Plugging in new services personalized to specific consumer needs is the future, and regulatory and technological frameworks that can adapt quickly are paramount.
- Educate the public
Anytime broad and significant changes occur to banking services, consumers need education and time to become aware and understand the benefits.
As a major element of PSD2, Strong Customer Authentication (SCA), is still in the introductory phase, the full impact of the directive — and open banking, for that matter — is a work in progress. There are a huge number of service providers who are coming up with focused solutions to add value to all types of financial service companies.
If the challenges of proper security, effective sharing, successful integration of new technologies and creation of new fintech models are overcome, open banking promises a future of growth, better experiences and a whole range of services unimaginable today.