Open Banking APIs Creating Real “Options” in Making Investment Decisions

With a very uncertain and rapidly evolving future there is a need to create “options” that can accommodate a variety of industry scenarios. The banking industry and financial services in general is in a period of significant disruption. Traditional strategies where a bank is all things to all people does not deliver the resilience, agility or speed required to effectively compete with new and emerging FinTech competitors. What is required is a strategy that accommodates and partners with FinTech providers to create a new and responsive ecosystem. Customers are demanding a seamless client interaction with easy and simple transaction processing across any device, through any channel at any time of day.

Welcome to the World of Open Banking.

‘Open’ banking was rolled out in the UK to enable consumers to share their financial data with a bank that suits the individual and easily track and analyze where their money is going. Open banking is enabled through Application Programming Interfaces (APIs) and on a consumer level allow for more choice about where they store money and will act as a one stop interconnected shop for all financial needs, also known as ‘Banking as a Platform’. To set up banking as a platform requires that banks specialise and open up their proprietary client profile and account data stores to third parties if clients request that of them; this is enabled through APIs.

As of January 2018 codes and regulations surrounding open banking came into effect that all UK banks must adhere to. As a result, banks are beginning to invest heavily in FinTech initiatives, internal development, and are also purchasing startups or forming partnerships in the field. This trend towards open banking is also underway in North America where it is driven by commercial rather than regulatory requirements. This trend is accelerating and banks that embrace “open” banking will become more agile, adaptive and resilient for having done so.

Creating “Real Options” Around Security, Identity, and APIs

As the world evolves, some basic functionality will be table stakes. Consumers are going to want to be secure, be known and want to keep it simple.

Open banking is a major trust and security play; the effectiveness and end success of the initiative will be directly related to consumer adoption and the benefits they realize. One certainty is that as it evolves, there will be more players, not less, and greater interconnectedness across and between ecosystem partners.

There is an upside and downside when the market evolution is looked at from the perspective of the consumer.

How Open Banking is Affecting The Consumer

Some logical extensions of today’s functionality exist:

✓ Transparency and money management will be made easier

✓ Alerts for overdraft

✓ Integrated tools apply for mortgages, tied to real estate agents and lawyers

✓ Maps of all accessible ATMs within region tied into your GPS

✓ Account information aggregated across several FI’s

✓ Real-time updates about investment portfolios

The options created by open APIs are limitless. Uber’s undeniable success in breaching the over priced and inconvenient taxi industry is a direct result of an integrated API that connects telephony, Google maps and payments. Another emerging use of APIs is ChainLink, the first decentralized smart contract network that is secure and trustworthy. ChainLink allows for anyone to securely provide a smart contract to key off chain data, payments and external APIs. This technology has the power to revolutionize and bring tangible and extended use to on chain data through creating a direct link with services and retail payments. Similar benefits exist with open banking in the financial services industry.

If we make the right investments now, open banking could become the autonomous vehicle of the banking industry. Customers could ride to their financial destination relying upon trusted secure technology to execute their financial plan. We now have the availability of software and new Fin-Tech market entrants to manage a client’s money consistent with the client’s direction and instructions. Daily transaction execution and banking can occur using voice commands and predetermined rules. To make this work however, banks need to invest in technology that creates options on routes that are headed to Banking as a platform destination.

The bank of the future will be a marketplace, offering clients the best products and services. The role of the bank will inevitably shift and where consumers store their money, the bank of the future could be an Apple, Amazon or Facebook. ‘Open’ banking will allow for new market entrants into the previously dominated financial sector, large cap banks will need to shift focus and reimage their company to stay afloat.

Validated third party companies will now be able to access the financial data of their clients and allow for seamless lending, online purchasing and loyalty programs. The opportunities for retail corporates are extensive and the chance to capitalize off open banking exists.

What lies ahead for the future of banking?

We will see an increase competition among retail banks; decreased margins, more shopping around and banks will no longer have exclusive rights over client data.

Creating real “options” in a customer-centered digital reality to an “open technology platform” changes the focus of competitive value proposition from the use of captive data to open data competing on services and functionality by creating value for consumers.

Financial Services companies are now waking up to the reality of open banking, PayPal, Wells Fargo and VISA are among these incumbents. Opportunities exist for FinTech companies to make themselves more attractive to incumbent banks.

Upside and Downside for Fintechs

Managing Risks and Security is Fundamental to the Ecosystem

In order for the ecosystem to work it must be secure and trusted. Banks may lose their ownership of the customer interface but customers still want to be secure wherever they transact. Consumers who give permission for their financial data to be shared will need to be fully aware of the risks and exposures they are taking on. Accenture conducted research with consumers, which showed that 85% of 18–24 year olds would trust third parties to aggregate their financial data. In contrast, 48% of 55–64 year olds were neutral or positive. This statistic shows varied importance of security by demographic group. Many consumers are less worried about the risks but are more concerned about the missed opportunities. Each group will need a tailored offer, and product suite.

Investing opportunities in Open Banking Options

The opportunities to open banking are limitless. If security and risk are managed, clear benefits exist for the consumer, the banks and new emerging FinTechs to take advantage of the open banking theme.

Success in this initiative will be realized when and if we collectively create options and take advantage of the opportunities while minimizing risk.