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Bank of the Future

Open Banking: Roadblock or Change Driver?

 
June 15, 2017

Banks have always been cautious in adopting new technologies. They have also been slow in reacting to disruptions by fintechs that are imparting rich banking experiences to customers. Governments globally are encouraging competition in banking through open banking. Government regulations like PSD2 and OBWG on open banking ensure that banks share customer information over regulated frameworks This will help banks and third party service providers gain additional insights about customers, and, in turn, innovate their banking products.

Following the implementation of the PSD2 regulation, banks in Europe will need to provide customers transaction data to account information service providers (AISPs).In the UK, the Open Banking Working Group (OBWG) has released the standard for open banking. In India, the RBI has permitted only non-banking financial corporations (NBFCs) to perform the role of account aggregators. All of these regulations enable customers to use third-party solutions for their finance activities such as financial planning and payment transfers. In addition to increased competition, these regulations will drive up compliance costs for banks. By 2018, they will need to put in place security measures and frameworks to protect bank data exposure over APIs. If banks fail to lead the evolution of banking services, they face the risk of turning into a back-end loan service provider, with fintechs and other non-banks taking over their customers.

Open Banking: Global Uptake Status

In the UK, Starling Bank has gained first-mover advantage by opening up banking APIs through a hackathon. In the US, Capital One was the first bank to adopt open banking. Its Credit Offer API provides in-principle approval for loan offers. To stay in the game, other US banks such as Spanish Bank, BBVA, and Sutor Bank quickly followed by launching their own banking APIs. BBVA offers account information to customers upon their authorization. In the Middle East, Emirates NBD launched a competition to develop solutions, to serve customers using open banking. Finally, in Australia, as part of the banking sector reform, the parliament committee has recommended open banking implementation by 2018. The National Australian Bank (NAB) has recently launched an open API platform for developers.

Innovative Open Banking Solutions

Open banking has given rise to a host of innovative banking services. For instance, Speaking Bank is a banking app for the visually impaired. In another instance, the aggregation API from Yodlee enables access to customer accounts either a bank account or a credit card account. This API enables lenders to credit-score customers in real-time, and predict patterns relating to the financial status of the customer.

Challenges for Banks from Open Banking

  • Complex and legacy applications

Over time, banks have built in-house applications and own highly customized market solutions, which make it challenging for them to adapt to the fast-evolving banking market. Heavy investments are required to build around legacy applications to adapt to open banking.

  • Dwindling market share

Banks have traditionally safeguarded the data they have with utmost secrecy, since it forms their customer base for sales and cross-sale of products. Exposing this data gives the competition a chance to lure their customers. Banks will need to develop personalized customer products that focus on improved customer service, or partner with a technology service provider to transform their banking business model.

Will Open Banking Adoption Accelerate?

The age of physical banking is transforming into the era of digital banking. Open banking will not only provide customers with an enriched banking experience, but would also make them custodians of their data, which they may choose to share with third-party solution providers. Open banking is thus an opportunity as well as a risk to banks. To adapt to a new world of open banking, banks will need to change the way they have approached banking. They must collaborate with third-party service providers, who can give them access to innovative ways of implementing digital technologies. Banks will thus be able to impart improved customer services and innovative offerings all of which will help them retain their market share and reduce costs on research and development of offerings.

Harish Kumar Dhilip Kumar is a Functional Consultant with the Banking and Financial Services (BFS) business unit at Tata Consultancy Services (TCS). He has more than eight years of experience with expertise in the commercial and consumer lending space. Harish has previously worked with leading multinational banks in the area of commercial lending, and has developed product offerings for EdgeVerves Finacle suite of financial solutions. He holds a Bachelors degree in Industrial Engineering from the University of Kerala, India.