Open banking, what’s needed to move forward?

Around the world, regulators are considering ways to encourage traditional players to ‘open up’ customer data to stimulate competition and standardise security protocols. While regulation is already on the way in some parts of the world, it alone cannot ensure the successful implementation of an open architecture framework in banking and finance.

Open APIs (Application Programme Interfaces) have already changed our day-to-day lives. When you jump in an Uber and connect your Spotify account, or search for a restaurant on Yelp and get directions from Google Maps, you’re using APIs. Banking applications are somewhat more complex, but even more impactful.

In addition to increasing competition and improving safety and security standards, open APIs in banking have the potential to provide us with a more holistic view of our finances, empowering consumers and SMEs to make more informed financial decisions. After all, who knows better than your bank if you’re overpaying a bill, or spending more than your peers on an internet package.

For an open architecture framework to become the norm in banking and finance, three elements must work together to build a cohesive infrastructure. Let’s dive in...

Regulatory support

We were recently invited to attend a World Economic Forum discussion where potential open banking architecture scenarios were explored. One  such scenario explored the idea that the Revised Payment Services Directive (PSD2) will encourage regulators across the globe to accelerate the process of ‘opening up’ banking data, leading to the global adoption of open banking architecture. 

We have already seen regulatory rumblings in the UK where the Competition and Markets Authority’s ‘Open banking Remedy’ covers similar terrain to PSD2. Similarly, In Australia, the government recently asked its Productivity Commission to examine the role of open APIs in facilitating data sharing between banks and third parties. In fact, aggressive timelines have been proposed to create a binding framework.

The future of open banking in the US is not so bright. Regulation is not on the immediate agenda and it’s not yet clear if lobby groups like The Consumer Financial Protection Bureau (CFPB) will lead the charge. The consensus within the industry is that its current political landscape is not conducive to the kind of open architecture framework which will underpin PSD2 in Europe. 

Industry commitment

For open banking architecture to work, the banks also need to be on board. Independent financial commentator, Chris Skinner has commented that “the banks are scared,” of PSD2 and a recent study by PWC paints a similar picture. The report found 68 percent of bankers fear PSD2 will result in the loss of customer interactions.

Despite some initial trepidation, the advent of open APIs in banking puts traditional players in the unique position to provide more innovative services to their clients, widen the scope of their distribution strategies and standardise security protocols to mitigate risk.

We have already seen some traditional players embracing open APIs in banking. Spanish bank BBVA has created an open API platform and appointed Shamir Karkal, the former co-founder and CFO of Simple, to lead the API business unit. In addition, Nordic bank Nordea recently announced an open banking site for external developers to experiment with open banking APIs. Other players will wait for the full picture to emerge, still unsure of what the technical requirements will be.

In any case, the traditional players will retain the all-important customer data, and as such, have no reason to be “scared”.

Consumer trust

Research shows new propositions based on open banking architecture are likely to be quite attractive to consumers, despite a general lack of awareness and understanding of what it all means.

A study by credit referencing agency Equifax found 90 percent of British citizens had not heard of the open banking initiative and a recent study by Ipsos Mori for Barclays showed that almost 40 percent of consumers would be happy to share their data to receive personal financial management services. This number is even higher among 18-24-year- olds.

At Spotcap, we have seen this willingness first hand, as our SME customers are happy to share banking transaction data to guarantee simple and efficient processes when applying for business loans. Even so, as an industry, we need to work hard to establish broad trust in open banking architecture. 

Although global regulation is unlikely, PSD2 will set the precedent and provide a starting point for regulators around the world. Industry commitment and trust are also crucial to the successful implementation of an open architecture framework in banking. We look forward to watching it all unfold.