In today’s changing environment, banks should prepare for open banking to address the threats of rapidly growing competition, and embrace the innovative technologies and customer insights that will come with this new way of doing business. Banks must focus on building an architecture that is Application Programming Interfaces (APIs) powered and data rich, and allows plugging into the bank’s eco-system while managing safety risks. It must reconsider its role and supply APIs as products enabling business outcomes. It is these interfaces or compatible APIs, that will transform the traditional banking model.
What is Open Banking?
Open banking is an emerging financial technology where regulated financial institutions share some customer financial data to permit competition, innovation, and better financial products. While traditional banking has relied on a private, 1:1 relationship between the bank and the consumer, open banking allows banks to provide ‘open access’ of its core services to third parties, partners, and key customers. Open access to some customer data challenges the normal model of banking as new players take a bigger role within banking value chains.
Benefits of Open Banking
The benefits of open banking will be felt by consumers and banks. As financial institutions collaborate with financial technology (FinTech) companies, innovation will drive better products and services for new and existing customers. Benefits to customers include streamlined digital experiences and simple, innovative products.
Why should banks address Open Banking Now?
In Europe, regulation is driving open banking by requiring banks across the EU to adopt. Some of the bigger EU banks, Lloyds, Rabo bank, HSBC, and Natwest have already made significant investments for open banking. And while international growth of open banking regulation has started, it is not level in every country. This technology is in the early stages.
The UK is leading the way in defining a framework, but additional regulation is needed to install multiple layers of tight security as more banks and FinTechs come online. In addition, there is regulatory pressure from Second Payment Services Directives (PSD2), forcing banks to standardized interfaces.
In the United States, customer demand is pushing the effort. The escalating call by customers for better digital experiences, easier ways to conduct financial transactions, more personal control over their financial data is moving US financial institutions to adopt open banking.
How Open Banking Works
Open banking allows a customer’s financial data to be shared by regulated financial institutions through the use of application programming interfaces (APIs). These APIs will shift the paradigm from traditional banking to open banking, gradually leading to the development of strategic ecosystems. Through association of key financial partners, banks will distribute, aggregate, and consume open API services enabling competition, innovation, and better products to be introduced in the market.
On a small scale, open banking has already begun. Examples include an agent issuing mortgages or consumer loans on behalf of a bank. The customer must explicitly provide consent for the banks to share their details to the third party and the customer can opt out or withdrawal anytime.
Industry Journey to Open Banking
As the industry moves toward Marketplace Banking and Coreless Banking, it is critical that agility is infused into the IT and business architecture to be able to address future needs. The decoupling of a bank’s systems and services from core banking enables the rapid creation and distribution of new products into the market through collaboration with third parties.
Regulatory mandates may require banks to comply sooner rather than later. To prepare for this new trend, there are things to consider that will improve an open banking strategy. Open banking is not as complicated as it sounds. The changes have to be based on two pillars: expanding ecosystems and extending current reach.
There is a huge potential in API development and Cloud strategies leveraging open banking opportunities.” Anmol Grover, Global Practice head, Open Banking, Wipro
As a first step, banks should strategize their overall objectives and decide on the avenues where open banking can fit their model. Some of the pertinent questions that will help banks build a strategy are included in the table below. Don’t just blindly adopt open banking. Think about how it fits into a bigger strategy to provide better customer experiences, extend reach and strengthen the brand, whether you build it or partner with FinTech to expand your offerings.
Work is underway in many countries to adopt open banking. While each approach may vary in the defining technical standards for implementation, it is increasingly clear that uniform API standards will be a key driver for adoption and quality of available innovative products.
Countries that have begun defining their frameworks include the United Kingdom, European Union, Hong Kong, Singapore, and Australia. For countries such as the United States and others that lag behind, market forces like customer demand for streamlined experiences and innovative products will drive adoption.
Build an architecture that is API powered and data rich, allowing leading FinTechs to plug into the bank’s eco-system while deliberately managing the safety risks. Reconsider the bank’s role and supply APIs as products enabling business outcomes.
How is Wipro Uniquely Positioned to Offer Advice?
Wipro was involved in defining Open Banking Standards in the UK as part of the Open Banking Implementation Entity (OBIE). We are also a member of the Banking Industry Architecture Network (BIAN), a nonprofit industry body aiming to standardize banking. Through these affiliations, Wipro is uniquely positioned to guide financial institutions through the move to Open Banking.
In addition, Wipro has invested in an open banking platform, Wipro’s Open Banking API, that includes a comprehensive set of offerings across regulatory compliance, data standards, governance, open ecosystems, and co-innovation to enable a seamless transformation journey for banks and financial institutions. This platform helps banks comply faster and create new financial products that will add additional revenue streams.
Market forces and regulatory mandates will drive open banking. Through the use of open banking APIs, the paradigm shift from traditional banking to open banking is gradually leading to the development of strategic eco-systems. Through association of key partners, banks are ready to distribute, aggregate and consume open API services.
As financial institutions embrace open banking frameworks, they need to realize managing an open banking eco-system is much more than just exposing a set of APIs through associated knowledge-based content and providing some level of developmental support. Banks need to leverage a “development first mind-set” strategy to nurture their eco-system through a comprehensive approach that covers API framework, delivery, support, and innovation. Open banking is part of the digital adoption that is underway worldwide and will pave the way for the next generation of banking for everyone.
Principal Consultant, Wipro
Karthik Markandan is an experienced managing consultant and has anchored various compliance and regulatory assignments for multiple global financial institutions. He specializes in leading diverse range of data, analytics, business intelligence, and cloud transformation programs.