Financial companies are beginning to adopt open banking, an approach that allows financial institutions to share customer data with other connected systems. Christian Ball of GFT analyzes the emerging trend and discusses how companies can fully realize the benefits of the technology.
Open banking is an emerging technology trend among forward-thinking banks that use an application programming interface (API) ecosystem to help them innovate products and devise new customer engagement strategies. Adopting this approach allows banks to better provide more personalized customer offers and other account information services so they can remain competitive in a rapidly evolving and increasingly agile market. Non-banking entrants such as tech giants and fintech companies are already making inroads and attracting new customers. There will likely be a shake up of the financial services industry in 2018 as established banks adapt their services to compete and go head-to-head with new entrants.
Creating an open API ecosystem allows financial institutions to share their customer data with other secure connected systems, using a set of clearly defined methods of communication between various software components. Customers are in control of the data that is shared, enabling them to benefit from new added value services that utilize their individual financial information.
Open banking is a fairly new concept, so there isn’t yet a great deal of historical knowledge for companies to draw on to make it an easy process to adopt. One place to look to for experience is the European banking market.
In Europe the move towards open banking is being led by a desire to innovate, but most urgently by a regulation known as the second Payments Service Directive (PSD2). Banks are required under PSD2 to comply with certain technical standards for new payment methods and innovations, such as the use of virtual currencies. PSD2 imposes a compliance deadline of Jan. 13.
This deadline has been forcing banks throughout 2017 to change their systems to create a more competitive landscape and provide consumers with a more extensive and cost-effective array of financial services and products. Given this legal imperative in Europe, banks in other countries that trade in Europe will also need to become compliant. And for those that don’t, reviewing the experience of those affected will help them determine best practices for implementing the technology.
Data Driven Insights
One of the fundamental changes with open banking is the focus on extracting the maximum value from customer data that was previously processed and stored, but not analyzed. The focus is now on greater analysis and use of customized customer data to provide tailored products, services, and guidance. The desire for customized guidance is evident in recent GFT research that found more than half (55 percent) of consumers feel comfortable with a bank monitoring their spending habits if it is then able to improve their disposable income through personalized offers, money saving tips, real-time reminders, and updates.
Banks are sitting on a goldmine of interesting and useful customer data, and with the aid of new technologies, it should become easier for them to analyze and use this data more effectively; in so doing provide a benefit for both the customer and the bank. Using transaction metadata gained from a smart transaction manager and personal financial management (PFM) tools, customers can aggregate their financial data from multiple financial institutions. Banks can benefit by improving the services they deliver to customer segments, providing individually tailored services that are personalized for each customer. Banks should also consider data from alternative sources such as social media to combine with their own data. Such data could prove invaluable to banks and could potentially be used as a means of streamlining account opening, providing background data for a loan application, or simply as a means to further improve the overall customer experience.
Banks will realize benefits from their data if they are able to build a detailed and accurate picture of their customers, since this will tell them which products and services are most appropriate to offer to each individual. 2018 is likely to be all about working with “fast data”—quickly gathering, assessing, and overlaying data from different internal and external web-based sources in real time. By automating the process, it will guarantee quality and consistency, as well as delivering significant scalability and capability benefits over manual data gathering, checking, and cross-checking.
New Models to Provide Alternative Services
Faced with increased competition, banks need to ensure they offer new and attractive types of services to their customers so that they don’t stray elsewhere. To do this, banks should consider moving to a “Bank-as-a-Platform” (BaaP) model. This is where banks move away from an environment that requires them to own all of the technology in which they transact their business. Under the BaaP model, banks can service customers by using a combination of their own technology and third-party solutions. For example, banks can use third-party money transfer services to conduct international financial payments, rather than having to build and maintain the infrastructure to conduct the task themselves.
Through a platform model, banks can provide their customers with all of the services they might want without having to bear the associated costs. But more importantly, they can use the time and budget that would otherwise have been deployed to focus on enhancing their customer service even further.
A recent GFT banking expert survey found that one third (33 percent) of banks have a BaaP strategy in design or implemented already, while 17 percent have a plan that has yet to be implemented. This is a promising start, but if retail banks are to truly service their customers’ needs, all players in the market will need to have a strategy underway in 2018 so they don’t risk losing customers to more agile financial service providers.
Regulatory drivers and the move to BaaP are pushing the financial services industry towards the open banking model. However, aside from technology and platform changes, banks need to analyze their current operation to embrace the new opportunities. This may be to support an evolved bank brand or new ecosystem marketplaces, or to drive the monetization of APIs as products.
Open banking is new and therefore requires a new way of thinking, new ways of working and an evolved organization that is both technically and business enabled. Teams within the bank are required to evolve—becoming a hybrid combination of skills and people that are more agile in how they work together. This hybrid approach is one which will cut across the more traditional financial services methodology in terms of its siloed organizational structure. Organizations will increasingly need to think about the product, the customer, the elements of the API as a product, and how they can be assembled in various ways to drive value. To do this, technologists and business heads need to come together and collaborate, and it is this collaborative experience that is so important for financial services to get right.
The Legal Imperative for Collaboration
In Europe, the Jan. 13 deadline will create a dramatic shake-up of the European payments market. PSD2, for the first time, compels the banking industry to give a potential competitor access to their customer’s data. This open banking environment provides an optimum opportunity for change and collaboration.
The key to open banking is data sharing, and this is particularly crucial within the organization, be it a bank or a fintech firm. For PSD2, legal, compliance and data protection teams will no doubt have been very busy analyzing the impacts of the new regime, and organizations should ensure that teams are aligned in their approach to implementation. For others toying with the open banking approach outside of Europe, the focus on monetizing the value in large amounts of customer data will raise similar issues that will need to be overcome.
Legal and compliance teams looking to adopt the open banking approach should:
- ensure the regulatory permissions they already have in place or are applying for cover all of the activities they undertake;
- amend existing documentation and implement new systems and processes to ensure compliance with the new regime, and ensure that any changes work smoothly from an operational perspective;
- update incident-reporting procedures, business continuity plans, and cybersecurity policies;
- review existing policies to ensure they adequately protect payment service users against industry specific risks, such as fraud and the illegal use of sensitive and personal data; and
- regularly test and review these procedures and have processes in place to file, monitor, track and restrict access to sensitive payment data.
With vast amounts of customer data being used, from a data protection perspective the PSD2 regulation aims to bolster consumer protection by ensuring that personal data is handled safely and securely. Data protection teams need to work closely with legal departments, particularly on the legal requirements when handling personal data and obtaining consumer consent.
Building new services is costly and time consuming. Open banking encourages the collaboration and innovation that the banking industry needs, but in an increasingly competitive arena. Banks and fintech companies need to strike a balance between taking advantage of the opportunities presented by open banking while complying with all regulatory requirements and cybersecurity legislation.
If there is one thing in 2018 on which retail banks must focus, it is to be entrepreneurial. Banks have previously been entrepreneurial in some ways within the confines of their own product innovation. Now they need to apply similar levels of entrepreneurship to their go-to-market strategy by reinventing and improving structures. Only then can they really be ready to embrace the open banking revolution.
—With assistance from Tom Bowie, an associate at Squire Patton Boggs (UK) LLP
Christian Ball is the head of retail finance services at specialist banking and IT consultancy GFT, having joined from Meniga, a fintech company in Europe.