The world of finance is changing at a rapid pace. Both on the retail and on the enterprise side of the financial industry. Innovations such as decentralized finance (DeFi), blockchain, FinTech, robotic process automation, augmented reality, artificial intelligence, hybrid cloud, and API Platforms are changing the landscape.
Adding complexity yes, but even more so, they give way to a whole new range of opportunities.
In light of these industry advancements, let’s hone in on Open Banking. Because it is through Open Banking that these opportunities become possibilities and in turn propel the world of finance into a new era.
Whether you are in banking or acting on behalf of a third-party provider, this is one innovation ready to revolutionize the way you do business.
What is Open Banking?
To answer what Open Banking is, we have to look at what is known as PSD2. The ‘second Payment Services Directive’ is a regulation that came into effect in the EU in 2015 and was implemented by European member states in 2017.
PSD2 redefines payment authorisation across the industry. Resulting in three main benefits:
- Increased customer rights
- Enhanced security through Secure Customer Authentication
- The ability for third-party providers (TPP) to access account information.
Open Banking is a series of reforms to how banks deal with financial information under the PSD2 regulation.
In layman terms what this means is that all regulated banks and financial service providers in the EU are required to be more transparent and open with the financial data of their customers.
Whether through regulation or by choice, the core benefit of Open Banking is the ability for the industry to expand their current business model and create entirely new ecosystems that attract customers who otherwise weren’t even in their periphery.
Open Banking in the US: unchartered territory ripe with possibility
The PSD2 regulation is for EU member states only and they are thriving because of it. Opening up their service offering and diversifying products for their customers. These regulations are currently not active in the United States’ banking industry.
Although clear regulation is yet to come to support the industry, the benefits of Open Banking are also pushing US financial institutions to innovate.
According to an Oracle 2018 global retail banking survey, consumers are demanding smarter and more relevant digital banking experiences. Close to 70% want their entire financial life cycle on digital channels. And 30% are open to try a fintech or challenger bank.
This shift in consumer demand is driving FIs to go beyond traditional offerings. One clear way to increase consumer engagement is to collaborate with fintechs through APIs. Leveraging both parties’ strengths and improving the customer experience.
This market-driven approach has been further accelerated in 2020 by the global pandemic and its subsequent rise of demand in online services.
API Platforms: A flywheel for Open Banking
Collaborating with fintech and other third-party providers becomes easy through the use of open-source APIs. Application Programming Interface (API) acts as a software bridge that enables multiple applications to ‘talk’ to each other.
An API architecture combined with Open Banking allows; financial institutions to gain additional revenues from products and services; increases market share from other providers; and empowers banks to remain the cornerstone for financial solutions.
When it comes to open-sourced APIs we can identify three types:
- Internal APIs used for sharing data across internal systems and users.
- Private APIs that let banks exchange data with their partners.
- Open APIs (public APIs) that allow for sharing data with a wide group of users while providing limited access to information.
It is mostly in the domain of Open APIs where the bulk of data interactions takes place. But how do you handle trillions of data streams with proper governance and security? With controlled access for customers, partners, and third-party providers at the same time?
In comes your flywheel: an API Platform.
An API management platform is a tool used to access, distribute, control, and analyze APIs in an enterprise setting. API platforms such as WSO2 API Manager, benefit organizations by centralizing control over their integrations while ensuring they continuously meet high performance and security standards.
Let’s look at a specific case study in private banking.
Case Study for Open Banking APIs: Seamless transition
Hanseatic Bank recognized the opportunities for competitive advantage in Open Banking. The compliance with PSD2 regulations offered a possibility to improve time-to-market and enable new business models. However, the Hamburg based private bank also felt a huge responsibility towards their current and future customers to protect their user data.
To harness these security standards, Hanseatic Bank would need an integration partner that could work efficiently in order to meet deadlines set by the European Commission. The solution would have to be adaptable, setting just the right technology infrastructures. In a safe cloud environment, with regard to the bank’s current IT processes.
With this in mind, Hanseatic Bank started to implement the Open Banking API and PSD2 compliance based on the WSO2 Open Banking technology stack. The company selected Yenlo as the system integrator. The flexible Integration Platform as a Service solution, called Connext, was exactly what Hanseatic Bank needed to complete their Open Banking journey.
Together with a committed team at Hanseatic Bank, Yenlo’s WSO2 Open Banking experts realized the implementation of Connext as well as the continuous managing, hosting and operational support of the platform.
What will your Open Banking strategy be?
Open Banking is reshaping the competitive landscape. Financial institutions that choose to invest in expanding their offering through third-party providers will reap the benefits: positioning themselves as true consumer-oriented brands. Able to pivot in a rapidly changing environment, whilst upholding the highest industry standards.
The pain will be mostly felt by banks that sit and wait for regulations while conducting business as usual. The time to adapt to Open Banking and be ahead of the curve is now. There is unchartered territory to explore and utilize. The support is more advanced than ever and the opportunities are here. The choice is yours. How will you serve your customers, partners, and ultimately your legacy?
Read the full story of Hanseatic Bank and connect with me on Linkedin. I am happy to think with you!