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Traditional banking is suffering pressure from market stakeholders to shift the ownership of the data from themselves to customers. This pressure enablement depends on the country or region and, sometimes comes from regulators (EU and UK, for example), sometimes from customers (US or China, to name a few). Independently from the driver, the consequence remains almost the same: open the data. This is fostering new business opportunities for banks and fintechs.
In this article we will explore what Open Banking is and its implications.
Open Banking is about providing open access to customer banking and financial data from banks and non-banks financial institutions to third-party services providers through an intensive of APIs. Of course, customers need to provide permission to allow their bank and other financial service providers to share their account-related information with Open Banking platforms.
Open Banking is expected to reach a market size of $395 billion by 2026 with close to 39 million customers globally, as Figure 2 shows.
Open Banking has become a global movement (Figure 3), but jurisdictions are adopting their own approaches, reflecting their markets and policy objectives, and in some cases developing cross-industry approaches beyond financial services. However, they all fall broadly into one of two categories:
Market-driven: a number of countries, including India, Japan, Singapore, and South Korea, do not currently have formal or compulsory Open Banking regimes, but their policy makers are introducing a range of measures to promote and accelerate the take-up of data sharing frameworks in banking. The US has also opted for a market-led approach, but without any material government initiatives to support the development of Open Banking products and services.
Regulatory-driven: Europe pioneered Open Banking with the EU’s PSD2 and the UK's Open Banking Standard initiatives. Outside the EU, Hong Kong and Australia could be two major jurisdictions having opted for a regulatory-driven approach..
Open Banking is perceived as an enabler in, at least, three main areas in particular:
Enhancing the customer experience
Launching new digital services
However, the Open Banking innovation will also capitalize on new emerging themes on the horizon.
Open Banking: a SWOT analysis
SWOT is an acronym for Strengths, Weaknesses, Opportunities, and Threats. A SWOT analysis is a strategy used by businesses for measuring and evaluating their overall performance, and that of competitors, in an objective manner so that business owners will be able to make smarter decisions for their company.
Looking to shed more light on where the market stands today for banks, we have summarized a SWOT analysis in the table below.
Centralized services: Open Banking provides banks with full control over financial services (advice, loans, transfers, and financing, to name a few) the customers need into a single dashboard. Customers who maintain their accounts in multiple banks can use a single TPP to access all their accounts and initiate payments without the need to login via different security protocols or using screen scraping.
High security: Open Banking mandates that these Open APIs that expose confidential data meet several security requirements, according to regulation or market standards. For example, in the case of EU’s PSD2, Open Banking APIs use OAuth 2.0 and OpenID Connect (OIDC), which are already established in the security domain are some of the measures taken to increase the security of APIs and customer data.
Improved customer experience (CX): practically all aspects of finance and banking can be re-designed thanks to Open Banking. In fact, Customer Experience is one of the primary beneficiaries of these changes, as Open Banking allows customers to gain a seamless and frictionless experience with their bank regardless of the TPP application they choose.
Accessibility: The digitization Open Banking brings into the banking experience is more likely to be adopted by the Millennials than the Baby Boomers (see Figure 4).
Additionally, the fact that open banking requires regular internet access is not in a position to benefit certain users who do not have access to the internet.
Weakens bank-customer relationship: Because everything is handled digitally, the face-to-face encounters between the customer and the bank are getting smaller. This can lead to a breakdown in the relationship.
Low customer credibility: While consumers show interest in open banking, they also express some concerns, especially about privacy, and the security and use of personal data (see Figure 5). Respondents called out potential theft of identity (69 percent) and misuse of data (60 percent) as the aspects of open banking that most concerned them. Meanwhile, financial concerns, such as losing money, ranked relatively low (41 percent) (figure 5). The rise in instances of data theft and breaches seem to have made consumers more sensitive about protecting their personal data.
Innovations: Open Banking introduces new roles and stakeholders to the typical banking ecosystem. Banks can make the most of these roles and can create new products and services. The key players here are TPPs, which are entrusted with depositor account information and transmitting instructions for fund transfers, and banks, which hold customer information and depositor account information and are responsible for managing this information.
Personalised offers and discounts: With open banking and open APIs, stakeholders can obtain more insight into financial data. This is advantageous in several financial analyses which will eventually generate more opportunities for the banking customers.
Ecosystems: This can lead to generating revenue rather than maintaining a conventional core banking system.
Monopolization: Banking today mostly comprises one/few major banks that define the market dynamics. Open banking has been introduced to make banking a more competitive business. One of its main goals is to offer a shared chance of success for all financial service providers. Even shifting to open banking can still result in the same monopoly these huge banks maintain and it’s an apparent threat in the financial industry.
Fraudulent activity: The financial institutions sharing customer data even with extreme security means is a potential gold mine for fraudsters, particularly through identity fraud. Fear not, Strong Customer Authentication, Transaction Risk Analysis and Fraud Rules are already available.
Fintechs: The growth of those companies that have replaced the banks is a major drawback for Open Banking. The Fintech market is growing. Their services are diverse and more and more there are a large number of them in all countries.
Open Banking Strategy: key points
All the information above must be considered to establish business and technology strategies when deploying an Open Banking solution (see Figure 9):
1. Formulate an Open API vision: banks can leverage their brands and customer bases to partner with other firms and offer new innovative services. As they chart a strategy, most banks will choose between three basic Open Banking models, as shown in Figure 10. They can all be combined in the bank’s overall strategy depending on the business use case.
Aggregator model: banks sell on behalf of—or together with—a service provider and act as agents. An obvious use case for aggregation is provisioning of account information from multiple bank accounts.
Distributor model: banks process what is ultimately sold by a third-party provider thus acting as a pure service provider or provider of a product, similar to a point-of-sale consumer loan for home appliances. In this case, the third party (i.e. home appliance retailer) owns the customer interface.
Orchestrator model: banks build their own platform or stand-alone application with products or services by integrating third party providers and ecosystems into their platforms.
The success of any Open Banking business model will depend on the value it provides or the monetization options it creates. Participants can bundle or unbundle offerings and services, and generate direct or indirect value. The quantum of value generated will depend on the overall market proposition, customer ownership model, partner value-adds, risk/liability share and other related factors.
2. Redesign products and services: Strengthening banks’ products and services relies on optimizing processes for providing them. Internal processes should be revisited and rebuilt to establish and leverage an integrated API model. These efforts should be seen as an opportunity to significantly improve the fundamental product and service supply system as well as service quality.
3. Build relationships between developers and TPPs: successfully delivering Open Banking involves an outstanding customer, developer, and operations experience.
4. Redesign IT as an enabler: IT will enable everything discussed so far. Artificial intelligence (AI), particularly machine learning (ML), is largely being used for operational enhancements such as credit granting and fraud control capabilities. Meanwhile, application program interfaces (APIs) have become a staple in the integration of new products and services. Similarly, cloud and blockchain adoption are noteworthy aspects of the ongoing digitalization as banks modernize every system across the cash cycle.
Measuring success: Open Banking KPIs
Additionally to SWOT analysis, before entering into new business models banks need to measure and monitor not only the key performance indicators (KPIs) specific to Open Banking, but also the impact of these KPIs on the performance of the business at a higher level.
Defining, tracking and measuring KPIs across each Open Banking outcome is extremely valuable, as it helps ensure the bank can deliver against its larger business and stakeholder obligations.
Measuring KPIs is not an easy task as it requires establishing foundational capabilities around operational readiness, technology and data that enable the bank to learn from, and iterate on, KPI results. In order to lower the complexity of such an assessment, the KPI framework provided at Figure 13 can be used.
Identifying and measuring KPIs that underpin each of these Open Banking outcomes support the ability to achieve higher-level macro KPIs that drive shareholder and other business values.
Open Banking is a technology-enabled approach to financial services based on sharing aggregated and authenticated data, accessed by APIs, to consume financial data while also making transactions more secure.
Open Banking should be at the forefront of digital strategy for banks. Data can be used in more ways than ever to drive value to incumbent banks by monetizing with third parties, extending engagement with customers through external digital channels, and providing a more valuable customer-centric experience by extending customer data beyond the “walls” of the institution. It can introduce new revenue streams through novel and proprietary APIs and so much more.
For banks that want to keep pace with market demands and outpace competitors, the move to open banking strategy will be paramount to their success.