Open banking regulations came into force in United Kingdom at the start of the year as part of the European Union’s broader Second Payment Services Directive (PSD2) regulations, which address data sharing and privacy.
The rules require UK’s nine largest banks – HSBC, Barclays, RBS, Santander, Bank of Ireland, Allied Irish Bank, Danske, Lloyds and Nationwide – to give access (with customer consent) to customer accounts via an open application programming interface (API) framework.
Although the market had been gearing up for the rules for some time, several top lenders missed key deadlines, requesting more time to comply with the rules and prepare their APIs.
Understanding why there is a delay would be a valuable learning for anyone in the rest of the world, as Open Banking is expected to become a global norm soon. Are banks deliberately stalling the inevitable future of Open Banking? Or is it more to do with difficulties around implementation-from both a cost and technological challenge perspective?
In this context, it is important to understand the three major categories of banks. Banks in the first category are averse to the new rules and see open banking as an existential threat. With data made open, incumbents would cease to be the sole custodians and controllers of banking ecosystems.
Customers can choose from a wide variety of fintech products, and could even change their accounts at will, including current accounts. As a result, banking monopolies would crumble, and only the best banks or fintech companies that can truly satisfy the evolving needs of customers would survive. A report by McKinsey estimates that banks in Europe and the UK currently have $35 billion, or 31 per cent, of profits at risk due to digitisation in general.
Several top banks are therefore understandably cautious about opening up their precious customer data to competition and disruptive fintech companies and venturing into uncharted territories. But, it goes without saying that it’s a rising tide that these banks are trying to fight against, and they will eventually have to come around to embrace the new ecosystem.
The second category consists of banks that are aware of the inevitability of these changes, and are more open to accepting the new trend. However, they have failed to comply because they are in a difficult position- bogged down because of large legacy systems and not being adequately data driven. This, in turn, severely limits their bandwidth for horizon-scanning and innovation. Some of these banks are now updating their core banking platforms and redesigning their business models to catch up.
Driving the trend is the third category of banks, which not only accept, but are also embracing the change in full swing by redesigning their business models and approaches. They are doing all they can to amplify the customer experience, be it through opening up their APIs, or forging digital partnerships to add more value. However, this category is not among the majority, and a large number of European banks still lag behind.
Open Banking: An idea whose time has come
The banking and financial system has evolved tremendously over the past few years. There has been a spurt in fin-tech companies that have contributed to the evolution of banking systems. New fintech companies have emerged to address niche problems. In such an environment, only innovation will determine the survival of the incumbents. They need to figure out what to do with their precious legacy data gathered over decades. This data is a potential goldmine for banks to drive targeted financial products and create new business models.
Advocates of Open Banking claim that it offers an exciting opportunity not just for customers and fintechs but also for incumbents to cash in. Big Banks will gradually evolve into distribution hubs that offer a much wider assortment of products and services, in partnership with fintech companies. They would still play an important role in providing the advantages of trust, scale and stability, while fintechs will offer the agility and creativity that new age customers demand.
The article is written by Srini Peyyalamitta, Head of BFS at Aspire Systems.