Part One: The Introduction to new world
The world is in constant digital transformation, faster than any century before. The era of the Information Society is ending and we are transforming to Knowledge society. The evolving continues with data science.
“The new oil is the data”
This statement was shared with the public for the first time almost 16 years ago. Since then almost all the sectors are trying to learn how to use data to manufacture products or services. Almost all manufacturers try to produce custom made and unique products for their customers (Know Your Customer). The “new” world citizens demand the unique and best experience together. The data of the customers is the essential and key ingredient for the product.
Banking sector is trying to evolve within this environment, with their stakeholders. Nowadays customers were already experiencing customisable products and services before the banking sector players or regulators came up with the fintech solutions.
Yet the Open Banking idea is still not reached their peak of the product life cycle. The concept is almost a three year old. That’s the first time regulators opened a new competition area for the native digital born entrepreneurship companies as well as old school banks. But this era also changed the competition rules. Banks opened up their hands to the newcomers and let them develop new financial services for the customers. We may call this “Coopetition” in the financial service industry.
Today, banks are developing into platforms where customers’ needs are met. This is led by the Open Banking idea and its key item “Application Programming Interfaces” (APIs). This may be interpreted as the industry-wide “open data policy”. FinTechs are eligible to utilize APIs opened by financial institutions for data sharing and this leads to more customizable and creative business models for both clients and financial institutions. This new financial world promotes more transparent and equal access to financial products for the customers.
What is Open Banking?
The time, localisation, availability and other physical and/or digital constraints do not strain individuals. Banking services are available almost 7/24 with internet and mobile banking applications as long as technological innovations and security measures allow.
Traditional banking is evading and customers are seeking “one ring to rule them all ‘’. That ring is Open Banking. The Open Banking diagram shows the fundamental concept.
Open Banking is defined as data democratization on the part of the sector. This technology also enhances the competitive environment in the financial sector across various global regions.
API Types and API Hubs
The most common API types diagram has been published by McKinsey. The classification has three API components, Internal, Partner/B2B and Public/Open
- Internal: APIs serve only for the company wide efficiency purposes.
- Partner/B2B: This kind of API layer provided for the organization’s business partners, such as suppliers, service providers, etc.
- Public/Open: The database is open for who wishes to externally access.
The data flows continuously and institutions create APIs. There is a vast ocean of APIs to analyze and come up with solutions. This situation has led to another solution providers, the API Hubs. In a simple explanation API Hubs collect APIs from different sources and combine them to create one unique, standardized API. API Hubs monetize this service and earn revenue. API Hubs are still developing and there is a gap for fulfilling this service demand. Banks and API Hubs startups have the opportunity to work together.
Concerns on APIs
The main concern for API is confidentiality, integrity, availability (CIA) and standardization. In other words data security and data frameworks/models of APIs. There are some standardization and multiple security architectures are developing at the sectoral level
to answer these concerns. We may point out the PSD2 as a regional or worldwide approach to this. On the other hand Berlin Group, STET France, CAPS, PRETA, NACHA are the API standardization initiatives.
We will discuss PSD2 in Part Two.
Disclaimer: This article has written for informational purposes only and does not constitute advice or an opinion binding people and/or institutions. It is intended to explain Open Banking.
Sources: Open banking APIs creating real “options” in making investment decisions, Chris Oswald, Ivey Fintech Club; Technology Report 2019, Softtech; FinTech Istanbul
