Banks started adopting technology as a means to achieve the ends of more business at lesser costs, higher customer engagement, greater retention and satisfaction levels, and very importantly, avoiding the drudgery of manual transactions. Unlike other products and domains which immediately see a profusion of latest technology interventions, banks were always circumspect and conservative with leveraging technology, because banks deal with their customers’ money. In a way, banks seemed to be initially cautious about adopting new technologies, but eventually seeing the merits of the adoption as well as evaluating the robustness of the technologies on offer, banks started making technology choices.
The concept of open banking
As the name Open Banking implies, there is something apparently “closed” about banks that makes a case for making them “open”. Banks by their very nature tend to be restrictive or closed to sharing of customer information with third parties, as customer privacy is sacrosanct. That said, in a digital world, everyone is meant to be connected and everything is accessible including data. What if the individual customer data which is otherwise available only to the particular customer is made available for third parties in real-time to probe, aggregate, analyze, and then form useful patterns for the customer or bank to make informed decisions? This in essence is the concept of open banking.
Constraints of Legacy systems
In terms of technology infusion, primarily it has been the product-centric model that has historically dominated the banking landscape. From a continuity, safety and ease-of-adoption perspective, it made sense to have a central monolith of a software product that undergoes periodic revisions in line with latest technologies that enter the horizon. However, not all banking software products can be designed with so much foresight to be modular and scalable to adopt or adapt all new technologies in times to come. This means somewhere down the line, banks are compelled to do away with their existing software products and adopt altogether new products which is sometimes not feasible due to cost and disruption issues.
Open Banking APIs – The Benefits
As the name implies, Open API’s address the inherent issues of traditional banking software products by mandating that the banking software product be open to external querying and access. Coming to think of the possibilities with Open Banking, there are many! A customer may hold accounts in many banks, and a 3rd party app can generate a “consolidated” account statement to the customer giving a view of his overall assets. A credit card statement of multiple cards can be generated which can be used to assess spend patterns. Bill payments can be automated if the customer can consent to a 3rd party and schedule payments. Loans can be availed with consolidation of present liabilities and determination of creditworthiness from past loan history instantly. Funds can be moved to and from fixed deposits or other investment products automatically which can help manage customer wealth efficiently.
For banks, open APIs help them generate new revenue streams based on data sharing models with FinTechs. Further, by exposing customers to third party products and services, banks can benefit from commission-based earning. So far, banks have been passive about the money that customer chooses to park with in their accounts, but with open banking, banks can precisely inform and advise the customer on efficiently redeploying the funds for higher and better returns.
Open API’s are still evolving and their widespread adoption much expected and foreseen the in coming days. The European Union set the ball rolling with Payment Services Directive 2 (PSD 2) which basically mandates banks to let their customers use Payment Initiation services and Account Information services from third parties. More and more larger and smaller banks have started collaborating with start-ups and FinTechs by building open APIs to enhance business value and customer experience.
On the face of it, it looks like a security hazard to make customer data available to anyone outside of the bank. But if the security challenges can be addressed satisfactorily, the benefits outweigh the risks and both banks and customers will greatly benefit from a whole lot of new possibilities. A lot of third parties can now write software applications that enhance user experience, and create AI-based tools using the bank’s data. What will please the banks is that these apps do not need the bank’s involvement in effort and costs, though certification from the bank for authenticity and usage could be a good idea. It opens up new business model possibilities for the bank to capitalize on its own data while putting to use the imagination and innovative powers of third parties. It is now up to the banks, to opt for Open API’s immediately as an early adopter or delay it till it becomes inevitable.