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.

API – the base for communication between pages

The majority of banks based their PSD2 directive implementation on one of the standards (e.g. Polish API or standard created by Berlin Group) but there may occur significant implementation differences between banks. Standards define some parts of the solution and banks are free to set their guidelines for the parts without specification. This “freedom” means that connecting with every single API will be required additional work. Also, the standard is not a necessary thing- banks can use it in their entirety, select certain elements or create a completely separate solution. We should also mention the evolution of the standards – this will generate the next batch of work of all entities connected to them. TPP will need the opposite – easy and efficient access to many banks with only one integration.

Access to full potential of open banking in one place

TPP main subject of interest is focusing on developing services – creating new innovative product and deliver an exceptional user experience. PSD2 directive and open banking have a great potential to support TPP business but also this is a challenge for them.

Interaction with several APIs will require a dedication of the significant amount of work that can be use more effectively. This same problem will appear when TPP need to maintain connection with different APIs. In the best case TPP will have to burn a lot of time and resources to adapt to dozens of APIs and this effort could be used in differences places more effectively. In the worst case TPP will not be able to find necessary resources loose the chance to use potential of open banking. In both case API aggregators will come to rescue.

API Hub – the bridge between banks and TPP

An aggregator is one unified interface that allows access to many banks when only one integration.

API Hub funcionalities

• provides one secure interface for access to many banking APIs
• one integration allows quick and easy access to extensive market/resources in a short time
• create a TPPs – banks ecosystem
• designed for developers has a full set of documentation and testing environment
• significantly reduces the costs of connecting to many banks and subsequent maintenance
•  is an opportunity for smaller banks to increase interaction with TPP
• support implementation of the AIS service – retrieve information on transaction history accounts from many banks
• support implementation of the PIS service – payment initiation

API Agregator should be created for developers, with full documentation. The structured and consistent data format, ensuring full compliance with the requirements of the PSD2 and GDPR Directives are the next basic benefits that these solutions bring.

Whizzapi is an effective bridge between fintechs and banks. Based on 15 years of experience in working with the banking sector we have gained the experience necessary to design a solution that will support entry into the world of open banking.