The promise and possibilities of Open Banking

The open banking ecosystem is thriving. It is poised to dramatically transform how banks and their customers engage and operate, at a scale and pace not seen by a banking industry, best known for its innate inertia for change. Unsurprisingly, this transformation, to provide payment initiation services and share account data with authorised third-parties has been brought about by regulation and poses a significant inflection point in the digital transformation of financial services. The high velocity of technological innovation and the shift to mobile first engagement provides dynamic new opportunities for banks and fintechs to enrich their services and products.

Open Banking is a powerful opportunity for both established banks and new fintech market entrants to develop and deliver impactful financial services to consumers and businesses alike. It has been estimated that PSD2 has the potential to create a revenue opportunity of at least £15.6bn by 2025 across retail and small-business markets.

However, there will be few players who will reap the benefits and live up to the promise of Open Banking and all that it has to offer. They will rely heavily on their ability to leverage the wider reach of Open Banking and realise early on that the power of Open Banking will impact not only UK and Europe and but perhaps the world. They will position themselves with strengths that are built from such qualitative aspects as the vision to pursue a much wider marketplace as also technological abilities to build an open banking platform, not stunted by country specific support. Instead, these players will build a sweeping assembly-line rollout of Open Banking solutions that support a pan-European and perhaps global reach. Indeed, for Europe alone such a vision and ability would provide a near-instant access to over 6000 banks and 300 million customers.

API Infrastructure and interoperability is perhaps the next impediment. The opportunities across Europe provided by Open Banking for banks to enhance their existing service portfolios and deepen their engagement with customers are however being hindered by the lack of a single established API standard for all participants to adhere to. To this end, the need of the hour is to provide Europe-wide Payment Initiation and Account Information services without the need to support multiple API standards. Banks must be able to publish different APIs across different business lines or locations, whilst only supporting one API of their own.

Furthermore, in the absence of a single settled API standard, the ideal solution would be a platform that could provide full seamless interoperability between all accepted formats – a platform that acts as a conversion 'switch' and that has the ability to harmonise and hide the differences between various APIs, making the whole interface simple and frictionless. Such a solution would support the multiple APIs for each existing regional, national or individual standard – enabling a bank to be accessed not only by its own published APIs - whichever standard(s) they chose - but also via other APIs in a transparent and interoperable manner.

In this 'interoperable' scenario, there is no need to be limited to standardising to a single 'aggregator' API. With true API interoperability you can both bypass the friction caused by multiple standards, while also avoiding the need to gamble on selecting a proprietary API standard in the hope this remains relevant and doesn't quickly become the 'Betamax' of PSD2. Organisations could choose one of the popular domestic API standards, and simply deploy this across all European countries via a truly interoperable Open Banking hub.

Additionally, it is increasingly apparent that the instant payment transfers across countries and regions bear added risks that need to be managed well for Open Banking to continue to grow and penetrate the payments arena as an accepted and preferred option. Fraud detection using AI-powered transaction risk analysis and fraud prevention to provide the highest levels of security, capable of identifying anomalies in real-time, such as the location of payer or spending patterns – including detection of unusual device or software configuration are now a necessity and a need of the hour. 

Such risk-based approach can dynamically require additional validation through Strong Customer Authentication (SCA), and can automatically block attempted fraudulent payments. The Open Banking platforms should be able to include integrated fraud detection and transaction risk analysis layer for open banking flows. It also needs to support fraud reporting and transaction risk scoring to dynamically enable or disable SCA.

Finally, a truly pan European Open Banking platform should also be able to offer visibility and control on the payments effected and the account information shared. To be able to provide on-demand visibility for the payment status, balance information and audit controls for all accounts of the user would provide the much-needed control on instant payments made across multiple banks, currencies and countries. It is fair to say that in the absence of such mechanisms, Open Banking solutions would not be accepted as a reliable and trusted payment solution.

In essence, Open Banking presents great opportunities for financial institutions, and an enormous promise for consumers and businesses. However, this needs a perfect blend of global vision, interoperable API technology, intelligent risk management and best practice controls to allow Open Banking to deliver on the promise and the possibilities that it offers to the payments world at large.