Opening up banking: the emergence of open banking ecosystems

Modern banking is characterised by fierce competition from fintechs, technology giants and changing customer expectations. Banks are increasingly leveraging technology to modernise themselves and deliver personalised, convenient, and comprehensive products and services to customers.  As such, open banking models are gaining momentum and will most likely be the norm for the sector in the years to come. In fact, studies indicate that open banking users are expected to increase from 18 million in 2019 to 40 million in 2021. The ongoing pandemic is also contributing to the growing acceptance of open banking as end users seek better insights into their overall financial health.

Understanding the open banking ecosystem

Open banking models use application programming interfaces (APIs) to aggregate customers’ financial information across different financial institutions to offer a unified view. The emergence and growing acceptance of open banking will allow banks to get sharper insights into customer behaviour and requirements, and then offer highly customised services and products. APIs present limitless opportunities for unlocking value from customer data, for innovation and revenue generation. The real-time access to data guaranteed by open banking can be amplified by intuitive business tools and advanced data analytics technologies like artificial intelligence and machine learning.

Regulatory authorities are moving fast to facilitate open banking across the world. The EU’s second Payment Services Directive (PSD2), the Hong Kong Monetary Authority’s national Open API Framework and Australia’s Consumer Data Right Act (CDR) require that banks provide access to customer data to TPPs through open APIs. Open banking regulations will prove to be a game changer for functionalities like payments because open APIs can make the process quicker, more transparent, and seamless. Open APIs can also be used to validate account information and pave the way for standardised identity management and authentication processes across banks and other financial institutions. This will go a long way in better addressing identity fraud cases.

However, there are some apprehensions about data security and privacy. Financial institutions have always been the owners and guardians of customer data, but in this new model third party providers will also have access. All players in the open banking system must address security concerns and put in place advanced AI driven security solutions as well as contractual agreements to safeguard their data.

The future of banking

How will traditional banks operate in a new open banking ecosystem? They could lose relevance and be relegated to a mere utility service if they don’t transform their technology infrastructure, operating models and even strategic vision.  By virtue of their superior technology prowess, fintechs and technology giants can monopolise the open banking ecosystem and push traditional banks to the side-lines. But this is an opportunity for banks to adapt and hit the reset button to become ecosystem orchestrators. They must consider adopting platform-based banking solutions to ensure that banking is integrated into the system and all financial transactions are facilitated and managed by banks. There is also significant opportunity for them to work collaboratively with fintechs by combining their technology expertise with the economies of scale of the traditional bank. Visa’s acquisition of Plaid, a company that builds data transfer networks to power fintechs and digital finance products, is an example of such a symbiotic operating model.

The open banking value proposition

Open banking helps create a marketplace for varied products and services through a single interface. It not only helps improve access to financial services, but by fostering healthy competition between various service provides, it drives greater value for customers who get wider choice. By leveraging the data collected across this ecosystem, banks can develop new products and services that prioritise convenience, transparency, speed and security. As specific areas like digital lending, mobile remittances and other micro services develop further in an open ecosystem, they will be able to diversify their offerings as well. Super apps will connect banks with many other financial and non-financial service providers to create an ecosystem. Open banking used in conjunction with this ecosystem has the potential to revolutionise the sector. Open banking will allow easy flow of information and create a network of business that deliver greater value to stakeholders. This could help the banks to eventually becoming curators and orchestrators of a robust financial platform rather than mere transaction enablers.

Open banking is just the first step towards allowing individuals to own their financial data and actions. This has the potential to evolve into a much broader concept – open finance, where an individual’s entire financial footprint could be opened to trusted third party APIs with their consent. This information will flow cross the ecosystem horizontally rather than the vertically integrated traditional value chain model. The ecosystem will be built upon collaboration and partnerships which will result in bundling, unbundling, and re-bundling of products and services to suit customer needs. The future of banking is based on cooperation and partnership between fintechs and banks where they collaboratively develop complementary strengths and strategies. Without a doubt the bottom line for the new era of banking is a customer centric, technology driven, agile operating model.

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