Open banking, from challenges to benefits

October 2018

Starting with January 13, 2018, with the introduction of a major EU regulation - PSD2 - the way institutions think about, provide, and commercialise financial services has been completely revolutionized.

The role of Open Banking

PSD2 fosters partnership opportunities between banks and other industry players, with open Application Programming Interfaces (APIs) acting as collaboration enabling catalysts. APIs combine functions and procedures to enable two-way data sharing between these institutions and third parties in a secure, scalable, and accelerated manner.

This regulation aims to create an industry-wide framework for accessing financial information, focusing on delivering incremental value to customers, simplifying merchant services, and encouraging competition between banks.

Nevertheless, as mandated by PSD2, banks will be obliged to share customer data only upon approval from the customer, while maintaining the privacy of data. This info can be accessed by TPPs to develop innovative offerings targeting various customer segments.

Are the customers willing to share their data?

Millennials seem to value the convenience and benefits of data sharing over any potential security threat, and part of the success of Open Banking could lie in the younger generations’ willingness to share their data for frictionless and convenient accessibility to services. According to a survey conducted by UK-based financial services consultant Altus, over half of 25-34 year-olds (54%), who are comfortable using an online service, are also happy to share information on all of - or a combination of - their savings, investments, pensions, other assets and their debts. Compared to older generations, the percentage of the millennials is significantly higher: 49% of 35-44 year olds, 44% of 45-54 year olds and only 35% of over 55.

Researchers concluded that younger users are attracted to both accessibility and convenience, as they are open to an online service, which allows them to have all of their financial information in one place across all providers (balance, savings, pensions, loans, mortgages etc.).

What do banks do in the light of Open Banking?

The evolving customer expectations and technology advancements have influenced banks to adopt a collaborative approach in both service and operations. For example, Barclays launched a new feature on its banking app that will allow customers to manage multiple current accounts from different providers.

Customers who have a personal or business current account with major banks, including Bank of Scotland, Halifax, Lloyds, Nationwide, NatWest, RBS or Santander, can choose to view their balances and transactions all in one place. The feature removes the hassle of logging into lots of apps and will appeal to customers who regularly switch banks to take advantage of the best deals.

To connect a customer’s accounts, users have to select their other banking provider from within the Barclays mobile banking app, whereupon they will be securely redirected to their other bank’s app or online banking page to choose which accounts they would like to connect with.

A similar feature has been rolled out earlier in 2018 by HSBC, called the Connected Money app, that enable users to see all their bank accounts together in one place. The app can display accounts from 21 different banks, including current account, savings, mortgages and loans.

As individuals and small businesses need to be able to judge the quality of service around their current account, the UK’s Financial Conduct Authority and Competition & Markets Authority have required banks to publish information on how likely both retail and business customers would recommend them, including on their online and mobile banking offerings as well as branch and overdraft services, to their friends, relatives and other businesses.

As a result, all British banks and building societies with more than 150,000 personal current accounts (PCA) or 20,000 business current accounts (BCA), as well as Northern Irish banks and building societies with more than 20,000 PCAs or 15,000 BCAs, must publish this information every six months.

Returning to APIs

However, concerns regarding the lack of harmonization due to the absence of a centralized API infrastructure (including common global API standards) may lead to shared API infrastructures developed in silos by banking communities. In Europe, several initiatives have been launched to create an open and common API standard for PSD2, such as:

  • NextGenPSD2, a standard developed by the Berlin Group – consisting of almost 40 banks, associations and PSPs from across the EU;
  • STET in Poland and PolishAPI in France, launched by consortia of banks in their respective countries;
  • a common API standard, now in works from the Open Banking Implementation Entity (OBIE) in the UK, an initiative mandated by the UK’s Competition and Markets Authority in 2016, ahead of PSD2.

For corporates, banks, and fintechs to unlock the Open Banking opportunities, they should actively get involved in the groups working on the harmonisation and implementation of standards. Also, potential collaborations should be explored, by co-developing API standards or working to provide other essential services such as API testing.