How Open Banking is Revolutionizing the Financial Services Industry

“Open banking” is an initiative first launched by banking regulators in the U.K. in 2018. Major banks in the U.K. were given one year to create open interfaces between their retail (i.e., individual) and commercial (i.e., business) customers’ banking accounts and payment systems in order to make it easier to share financial information across banks, Fintechs, and third-party providers (TPPs). Leveraging APIs, authorized Fintechs and TPPs can view and analyze banking customer data (e.g., expense patterns, loan history, etc.) and then use various technology levers to present these customers with tailored financial products.

The ultimate goal of this initiative is to ease financial information sharing among financial stakeholders (with the client’s consent) and to encourage banks to collaborate with Fintechs and TPPs instead of competing with them.

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Global Adoption

Since its launch on January 13, 2018, open banking has been rapidly adopted across the U.K.:

• 300 Fintechs and innovative providers have joined the ecosystem¹
• 2.5+ million U.K. consumers and businesses now use open banking-enabled products¹
• Every month, hundreds of thousands of U.K. consumers and businesses become new active open banking users¹
• API call volume has increased from 66.8 million in 2018 to nearly 6 billion in 2020¹

Now global markets beyond the U.K. are beginning to adopt open banking. Not only will it lead to faster financial services innovation, it will also open up competition — leading to a transparent financial market and enabling clients to make the right decision at the right time for their financial goals. This step further reduces the barrier of entry for the neo banks, Fintechs, and startups to enter the banking industry — along with getting the incumbent banks to modernize their infrastructure to address the new era of banking.

Of course, in order to successfully implement open banking and create a seamlessly functioning ecosystem, the right stakeholder and technology levers must be in-place and in-sync. In the next two sections, I will briefly describe each of these moving pieces.

Ecosystem Players

Banking Regulators

In the U.K., the open banking initiative is overseen by the Open Banking Implementation Entity (OBIE); governed by the Competitions and Market Authority (CMA); and funded by the U.K.’s nine largest banks and building societies³. In other countries like the U.S., China, Singapore, Australia, and Canada, regulators act as the primary stakeholder to normalize open banking and enable a safe and secure setup for banking customers.

Major Banks & TPPs/FinTechs

Open banking has got off to a good start with major banks, and I expect the trend to continue growing since it provides a much more open playing field for ecosystem partners to operate and collaborate for customer engagements. For example, BBVA has launched a BaaS platform called Open Platform; HSBC has launched a Connected Money app; and Barclays has enabled account aggregation inside its mobile banking app². On the other end, TPPs and Fintechs are trying to leverage various technologies like artificial intelligence, machine learning, and big data to proactively offer customized solutions for clients.

Retail & SMB Banking Customers

Open banking also benefits banking customers (retail, SMB and commercial) customers by providing them with access to multiple personal finance management (PFMs) tools/vendors and a consolidated interface for financial transactions. Of course, the customer has sole authority over their financial data. Customers must authorize their bank to share their data with TPPs and Fintechs, and they can decide how long a TPP or Fintech has access to their data. The customer gets to choose banking products per their needs — whether that’s a product from their incumbent bank or a TPP/Fintech — and their private banking credentials cannot be disclosed, stored, or retained.

Technology Levers

Banking API

To achieve the level of transparency and security required for open banking, banks must update their legacy infrastructures to support open APIs, which is what enables TPPs and FinTechs to view and analyze the banks’ client account information. As mentioned earlier, banks must first get permission from their customers about how to manage their information. In return, the banks use various tools and technologies to monitor customer data and leverage it to enhance their offerings across loans, insurance, financial services, etc.

 Data Privacy and Security

Data privacy and security are the most important tenets of open banking. Financial regulators have deliberated data privacy and security heavily, which can change depending on the geography and banking standards.  Banking clients must be able to trust that banks will share only what they want, for how long they want, with authorized TPPs and FinTechs who will also protect their information. They must also feel secure that their data will not be leaked through hacks or leaks during the transmission between banks and TPPs/FinTechs, which is why these institutions must harden their security measures by using various steps like data encryption, no retention policies, system firewalls, etc.

Conclusion

GlobalLogic has been working within the BFSI industry for over 15 years, helping financial services institutions of all types adopt digital transformation, from UX and architecture advisory to full-service product engineering. Our expertise includes:

• Open banking & PSD/2 implementation
• Enterprise application integration
• API management programs
• Architecture assessment & reference (API & integration)
• iPaaS advisory & implementation
• Master data management & synchronization across the enterprise
• Business process & workflow automation
• Cloud & on-premise platforms

Based on this experience, I expect that open banking will continue to evolve with new standards and measures as countries customize this initiative to create an easier-to-use banking platform. Customer adoption will also likely increase multi-fold as we move towards a hardened, secure, and validated open banking ecosystem. Not only will open banking provide transparency across the banking ecosystem, but it will provide banking customers with more choices in financial products and vendors than ever before.