Open Banking has become standard in many markets across the world, since the introduction of regulations such as PSD2 in EU, Open Banking in the UK or their counterparts in Australia. But authority-led Open Banking ecosystems are just one of the approaches that countries or regions take worldwide to making financial data available for service providers outside of the banking sector.

We have discussed previously how open banking works, particularly in the EU and UK frameworks. Today we want to focus on what it can offer in the markets where the digital banking data ecosystem is not yet governed or mandated by top-down regulations. In other words: should banks and financial institutions provide access to their customers’ account data if they don’t have to? Can it make them more innovative rather than losing the competitive advantage of exclusive access to that data?

As we recently launched the open banking implementation for Kuwait Finance House – which became the first bank in Kuwait to implement an Open Banking system ahead of anticipated regulations to be proposed by Central Bank of Kuwait – we would like to share what we have learned over the course of the past few years of working with open banking.

What is Open Banking?

In a nutshell open banking means using open APIs to share specific types of data on a customer’s financial transactions between the bank managing their account and third-party providers (TPPs). TPPs can be financial service providers as well as non-financial companies or organisations using an existing open banking infrastructure for their operations. The access to data is only given with the customer’s consent.

This data can be used to build new products and services or facilitate processes like transaction processing, recurring payments, user authentication, credit scoring and many others.

In the case of EU and UK the services enabled by open banking were based on making two types of API-based services available to third-party providers:

• AIS – Account Information Services. Access to information about the customer’s account, its balance and transaction history as well as the ability to verify the customer’s identity.
• PIS – Payment Initiation Services. The ability to initiate payments immediately and directly (without relying on credit cards or services such as e-wallets or consumer loans).

The Australian and Hong-Kong open banking implementations went even further, enabling TPPs to e.g.: access credit scoring insights generated by banks, issue credit cards or purchase stocks on behalf of their customers.

For more details on features and use cases, see our previous post.

What is The Business Value of Open Banking?

When Open Banking principles are imposed by introduction of new regulations, some banks may find it inconvenient to invest additional development workload in order to share the data that they used to exclusively control on behalf of their customers. After all, one of the guiding principles of open banking is increasing competition in the financial services market and that means democratising some of the value that used to be owned by a small group of incumbents.

However in a fast-paced field like financial services all market players have to adapt to a changing regulatory and technological landscape. That way financial services can get more efficient and cheaper and the efficiency gained this way can be forged into new, innovative ways to deliver value to customers.

And thus the implementation of open banking, whether it was regulation-led like in EU and UK or market-led like in Hong Kong and Singapore, has introduced new capabilities both to banks and TPPs such as fintech companies. Some of the services that have become more efficient and accessible thanks to open data are:

• personal finance management
• remote user authentication
• recurring payment management
• pricing customization
• credit and loan brokerage
• improved fraud detection

Open Banking is an initiative that benefits immensely from network effects: the more companies join the ecosystem the more they can build on each other’s market reach and services. For the consumer this means getting better deals thanks to the ability to compare financial service offers. For banks this means the ability to cater for customers of other companies in the ecosystem. It also means new opportunities to become a market leader by going a step further than the competition.

Open Banking may be the most efficient when regulated by consistent top-down standards and universal requirements for all parties in the ecosystem. But where these regulations haven’t been implemented on a national or regional level, open banking principles can be introduced through development of market-led initiatives where the companies involved in using banking data partner up and create their own ecosystem.

Why Banks Should Push For Open Banking

Open banking reaches its full potential when the ecosystem of participating banks and third parties grows enough to enable network effects and synergistic innovation. In the markets where it has been implemented customers enjoy fuller control over their financial data and better services that emerge out of increased market competition.

Banks enjoy perhaps the greatest range of benefits, such as:

• New revenue streams – since open banking data is made available by all participating banks and a wide array of third parties, banks have the opportunity to leverage this data from both their direct competitors and fintechs or even regular businesses. They can build their own innovative services on top of that or get a better insight into the business potential of other banks’ customers.
• More efficient financial services – issuing credit cards or loans, or other processes based on financial risk assessment, are more accessible and efficient with open banking. Banks can access a more comprehensive dataset about customers’ financial record than just their credit history. On top of that, they no longer need the competitor banks’ active participation in the collection of transaction history – in open banking this data is immediately available via an API.
• Aggregated financial data – one of the main use cases of open banking are secure and regulated personal finance management platforms which aggregate transactions from multiple bank accounts of a customer. Aside from offering PFM services banks could use such aggregated data for business intelligence and tailoring their services to specific customer needs.
• Improved security and fraud detection – PSD2 and UK Open Banking require banks and third-party providers to meet improved security standards and data protection laws. These types of regulations decrease the risk of bank account data being shared with an unreliable company or unauthorized parties.

Should Banks Implement Open Banking When It’s Not Mandatory?

Open banking is here to stay. Even in the markets such as the US, where participation is not mandatory and the ecosystem is not regulated on a governmental level, the financial companies have a long history of sharing data between each other, in order to provide new and improved services. The global market also pushes companies from different regions to keep up with open finance trends, especially if they want to branch out into countries where open banking is a standard or compete with international companies that are leveraging it.

So, while inviting other market players to use one’s customer data might seem like a risky business move, the banks that move first in the direction of open banking, before their regulatory environment gets there together with all their competitors, can enjoy a range of immense advantages, such as:

• Setting industry standards for future regulations. A common practice for preparing market regulation is consulting the market leaders in order to meet their needs and learn from their good practices.
• First mover advantage. Even though PayPal and Stripe weren’t the first fintech startups to ever exist, since their first years in business they have dominated the market as some of the first payment service providers where traditional banks couldn’t match their offer.
• Creating an open banking platform compatible with the bank’s needs, rather than having to implement guidelines, of which some may be incompatible with the bank’s business model or the way it operates.

For the banks that take the leap into the open banking territory as first movers in their markets the result can be unlocking a new level of unprecedented innovation enabled by building data sharing ecosystems with new kinds of business partners. Before regulations in this space come into force in a given region the banks can enjoy a level of flexibility and competitive advantage not available to those financial institutions that had the open banking imposed from the top down.

When the open banking regulations entered into force in the European Union (PSD2) and the United Kingdom (Open Banking), they caused quite a stir on the market. Financial services have become faster and more accessible to all businesses, and the market has opened up to new types of products and services.

What Open Banking changed in the finance sector

PSD2 and Open Banking have given European consumers and SMEs a control over their financial data that used to belong almost exclusively to the banks managing their accounts. Passing on this data or making it available to third parties is no longer a lengthy bureaucratic process as it used to be.

Processes that once took minutes, hours, or even days can now be initiated almost instantly. They have become cheaper and safer, and consumers have also gained new opportunities to manage their finances across different banks and accounts.

Open Banking directives give verified third party providers (TPPs), such as our Whizzapi platform, two basic options:

• AIS – Account Information Services: Access to information about the customer’s account, its balance and transaction history as well as the ability to confirm the customer’s identity.
• PIS – Payment Initiation Services: The ability to initiate payments immediately and directly (without relying on credit cards or services such as e-wallets or consumer loans). 

With these capabilities and newly available data supported by safe and standardized technology, a whole range of benefits are now available to both consumers and businesses.

Open Banking benefits for consumers

Open banking helps consumers make informed and hassle-free financial decisions. They can use Personal Finance Management (PFM) platforms, which allow them to take control of their spending, saving and investing, with features like:

• Monitoring their monthly budget, bills, loans and credit card fees;
• Managing recurring subscription fees;

With open access to customer account data (Account Information Services), consumers can use various platforms for:

• Easier and faster transfer of their accounts to another bank (they do not have to provide extensive documentation and rely on the banks’ arbitration – access to the information needed for verification is possible via API);
• Easier access to credit and loans that they could not get before. This was usually due to the lack of sufficiently documented credit history to meet the formal requirements for the loan. Now, thanks to open banking, banks and lenders can use the customer’s bank account history (e.g. bills, subscription fees, rent, debt history, credit card repayments) to quickly calculate credit eligibility.

Open Banking benefits for business services

The introduction of open banking had far-reaching, revolutionary consequences for both financial and non-financial companies. Giving non-banking entities access to a payment initiation service, account information, and the ability for verified entities (e.g. FinTech companies) to issue payment cards, has pushed competition and innovation in the banking sector, in which many incumbent market players have resisted change.

New, improved financial services

With API banking aggregators like Whizzapi, both financial and non-financial companies can provide:

• Payments without intermediaries. Thanks to the open banking API aggregators, payments can be collected from the customer’s bank account without the need for a payment card, e-wallet services or payment processors (eg PayPal, PayU or Stripe). Payments via API are initiated or rejected immediately after receiving the customer’s consent, given the availability of funds on his account, The funds are then transferred to the merchant’s account at the time specified by the bank, just like a regular money transfer.
• Briad access to recurring and postponed payments. Open banking allows companies to flexibly manage subscription models by creating their own recurring payment mechanisms. This can be used by different types of organizations: from streaming platforms, to rental services, to schools, kindergartens, and even local cooperatives. Another possible application of open banking is the introduction of the “Buy now, pay later” model (BNPL) without being dependent on external payment services such as Klarna or PayPo. This payment model has become a breakthrough in e-commerce by making it easier for customers to make purchasing decisions: they can order, check and return the items without having to pay for then in advance and wait for a refund.
• Simplified financial risk assessment. Thanks to the access to information about the bank account, open banking API allows you to verify the customer’s solvency without the need to commission assessment reports from the bank or other financial institution.
• Improved fraud detection. Open Banking API standards provide an additional layer of security for user authentication (eg 3DS or strong customer authentication). As account activity monitoring can now be automated, it also allows you to be notified immediately of suspicious activity and take appropriate action in no time.
• KYC and faster and remote client authentication. In the past, many sensitive operations, such as opening an account or signing contracts, required customers to meet a representative face to face, to allow for identity verification. Thanks to open banking platforms, many of these processes can now be digitized and safely executed remotely, which was critical to maintaining business continuity by many companies during the pandemic. This digital revolution will continue to increase the availability of high-security services.
• Payment reminders. One of the most common reasons why customers don’t pay their bills on time is not because they are out of funds, but because they have simply forgotten. Thanks to the account information services provided by PSD2, in the event of payment delay, you can check whether this is what actually happened and easily send the customer a payment reminder, streamlining your accounting activities.

Open Banking benefits for operational management

Before PSD2 came into force in the EU and the Open Banking regulations in the UK, all these advanced features required customers and businesses to coordinate procedures with a bank or financial institution that usually charged transaction fees and required tedious bureaucracy.

Now, thanks to open banking platforms (such as Whizzapi), non-financial companies can, with the consent of their customers, gain direct access to information about their bank accounts and initiate payments. All of this through a secure, regulatory-compliant protocol, transparent interface, and a data enrichment platform that each company can use to meet their own business and operational needs, such as:

• Accounting, financial management and investments. Thanks to the open banking API aggregator, all of the above benefits can be used for factoring, portfolio management and as additional support for insurance decisions.
• Personalization of customer service. The data enrichment platform allows you to create and manage customer profiles based on their bank account history, including transaction titles and recipients (Whizzapi also offers transaction categorization). This can be useful when deciding to defer payments, assigning account managers, personalizing marketing, or creating special offers for customers with a specific financial profile.
• Financial continuity and expanded funding opportunities. With an Open Banking API aggregator such as Whizzapi, you can leverage Account Information Access (AIS) combined with a data enrichment platform to verify if a given customer can afford services on a regular and predictable basis, without the need to hire external credit analysis services.

Whizzapi provides a programming interface and secure, verified payment services that you can use regardless of your type of business to build your own basic payment system and even integrate it flexibly with other financial services if needed. A banking API aggregator can bring value regardless of the area of business ​​activity: to utility providers, real estate agencies, car rental companies, private schools or providers of other subscription-based services. It is a comprehensive system for authentication and secure payment automation, compatible with all banks in the European Union and Great Britain.