Open Banking: Threat or Opportunity?
Traditional banks are facing significant challenges due to the emergence of digital banks and fintech companies. These new competitors leverage advanced digital technologies to offer more agile and user-friendly services. They heavily utilize data to gain insights and deliver personalized products, posing a threat to the conventional banking model.
Moreover, recent regulatory proposals in Open Banking by the Consumer Financial Protection Bureau (CFPB) promote the controlled sharing of bank data via Banking APIs like the FDX standard. This regulatory shift towards Open Banking platforms is anticipated to impact financial sector operations, enhancing competition and efficiency. Over 200 members participate in the adoption plan for a new API standard for Open Banking in the U.S.
Aligned with global initiatives across Europe, mandated by the PSD2, and in South America, following Brazil’s central bank mandate in 2021, as well as various other regions, Open Banking APIs follow rules and directives to facilitate Financial Data Exchange (FDX) while incorporating considerations for legacy system modernization. The objective is to standardize the Open Banking model, providing increased legal clarity for banks handling customer data and users intending to share such data. This initiative aims to maintain alignment with the General Data Protection Act (LGPD).
What Are the Changes for Users After All?
Open Banking, specifically through the use of Open Banking APIs, revolves around the notion that individuals, rather than banks, own their data. By sharing information with alternative channels, users gain the ability to explore products and services for enhanced advantages and convenience. They can streamline their financial management within a single application, eliminating the need to download multiple apps for expense organization. Additionally, users can share their economic history with other banks, enabling the latter to tailor customized offers based on individual profiles. These scenarios illustrate the potential applications of API integrations for banks.
The potential for innovation and novel solutions, particularly in core banking data, is remarkable in this trajectory. Chip serves as an illustration of an application linked through the Open Banking API with certain European banks. Its purpose is to scrutinize users' spending behavior by analyzing their financial transactions across bank and credit card accounts. Utilizing an artificial intelligence algorithm, the application automatically invests funds without affecting the user's daily expenditures. In essence, Chip autonomously allocates funds, simplifying the process of personal financial savings.
Anticipated outcomes include heightened competition, reduced consumer prices, and the emergence of novel products, services, and payment methods stemming from the mandate for banks to share customer information with other financial institutions.
But, Is Open Banking an Opportunity or a Threat?
While Open Banking, including the use of the Open Banking API, is frequently perceived by traditional banks as a significant threat, the reality is that a vast array of opportunities awaits exploration alongside the clarity provided by regulations. The benefits derived from Open Banking will be contingent upon the strategic positioning adopted by each financial institution. The ensuing examples illustrate three distinct positioning approaches:
- The financial institution aims to fulfill regulatory requirements to the minimal extent necessary, enabling third-party providers (TPPs) to execute payment services and access essential information regarding offered products and services. This includes access to customer registration and transactional data, ensuring regulatory compliance with commitments outlined by the Central Bank.
- The financial institution seizes the opening of transactions via Open Banking APIs as a chance to enhance revenues or create additional value. This involves utilizing Open APIs as a novel channel to amplify the distribution reach of its banking products, supported by a revenue-generating business model. An illustration of this approach is evident in Cielo's QRCode, where diverse partner applications can craft a customer payment experience for its QRCode product using Open Banking API. As Open Banking matures, it transcends being solely a regulatory requirement and evolves into a revenue-generating mechanism.
- The financial institution adopts a service platform stance (BaaS - Bank as a Service), enabling other firms to construct innovative Open banking solutions using its financial services accessible through Open Banking APIs. Banco Topázio is a notable example, providing a digital financial services platform through Open Banking APIs.
Currently, as the regulation of Open Banking is being deliberated, adopting the "New Experiences and Leveraging Products" approach is relatively straightforward, akin to low-hanging fruit. Existing products and legacy financial services within traditional institutions can be promptly updated for integration into an Open Banking framework.
This not only facilitates revenue enhancement but also positions the institution ahead of future regulations by proactively establishing technological, legal, and security foundations. In essence, this strategy provides a competitive edge, allowing the institution to actively participate and elevate its digital experiences.
The Four Pillars of Open Banking
Commencing the Open Banking initiative can involve various operational aspects. However, four foundational pillars are essential:
- API exposure: Amid the ongoing regulatory development, the data and transactions to be opened under Open Banking don't inherently set a competitive advantage for data providers. Rather, those utilizing the data have the potential to enrich and intelligently apply it for business purposes. Determining Open Banking API exposure should be guided by the aim of value creation. The subsequent focus should involve ensuring clarity in the Open Banking API's purpose, a straightforward access design, and friction-free consumption. This will allow the Open Banking API to function as a pathway for financial transactions.
- Strategic partnerships: Through Open Banking, banks have the opportunity to establish strategic B2B partnerships, extending beyond collaborations solely with fintech firms. The goal is to integrate with partners to optimize the utilization of customer data and services, which are made accessible through Open Banking APIs. Initially, these partnerships concentrate on the business segment or customer profile already engaged by the financial institution, leveraging the partner's relationship network to enhance reach and connectivity.
- Security: A foundational aspect for any bank, alongside liquidity, fostering trust, and credibility, is data privacy in financial services. When revealing financial data and transactions, prioritizing utmost security is imperative. Encryption technology plays a pivotal role in safeguarding sensitive information during data transmission. For Open Banking API consumption, authentication and authorization mechanisms, akin to other digital channels in banks, are required. Regarding open data in Banking APIs, the terms might suggest exposure of customer information, but this is misleading. Access to data is tightly controlled and secure, with only authorized entities permitted to access it. The access granted to third-party providers (TTPs) can be revoked at any given time.
- Governance and compliance: Entail establishing legal frameworks for data and open transaction providers to handle liability in the event of security breaches or unauthorized transactions. Ensuring transparency involves informing customers—whether individuals or businesses—about their data's utilization, control, storage, and audit procedures. API governance is crucial to maintaining detailed transaction records, specifying who accesses Open APIs, when, where, and through which device and application. Managing consent for financial data access is another facet, where access by third-party providers (TPPs) to a bank account's data and transactions requires explicit permission from the account owner, aligning with Open Banking principles.
Banks initiating these measures will be significantly better equipped to adhere to regulations. By establishing and planning the necessary technological infrastructure, the challenge of merely maintaining regulatory compliance can transform into an opportunity to explore how new ventures can enhance the prospects of these institutions.
Is Open Banking Intended for Banks Only?
Open Banking, driven by API integration for banks, is poised to foster a more open and interconnected financial market, unlocking fresh business prospects for both banks and companies in sectors where financial transactions play a pivotal role. A notable example is the retail sector, where advancements in eCommerce APIs are transforming major retailers into financial entities. The acquisition of fintech company Ewally by stores like Riachuelo, Pernambucanas, ViaVarejo, and Carrefour exemplifies this evolving trend, highlighting the growing scale and appeal of such endeavors.
The dynamics of Open Banking, facilitated by the use of the Open APIs, are presently unfolding to facilitate business transformation. Taking a broader perspective beyond regulatory concerns is a strategy to secure an advantageous position in the financial sector's evolving economic landscape.