Open Banking – defined as a banking network that fosters secure data sharing through application programming interfaces (APIs) – is more than a regulatory must in many countries -- it holds a promise for delivering new value streams by giving customers new digital touch points to accessing their financial information. It’s also expected to open the door to new revenue streams for financial services organizations. But fulfilling Open Banking’s promises will take effort.
The use of APIs in banking is growing, especially in Europe, in part spurred by initiatives or regulations in the United Kingdom, Germany, and more broadly in the European Union. API frameworks are in development in the Asia-Pacific region, with an "API Playbook" being released in Singapore. A United States Treasury report endorses open banking, noting that APIs can play a key role in this. And while open banking is not yet required by regulators in South America, Brazilian banks are moving ahead with API testing.
Government and industry-driven initiatives can sometimes run counter to business’ need to grow both their bottom and top lines. But an Accenture report estimates that European banks that embrace open banking can profit from a potential revenue uplift of 20 percent. And when organizations create a vibrant ecosystem around their digital platform, they can tap into a wealth of innovative applications in industries such as hospitality, housing, and mobility.
However, banks will have to work to ensure that their APIs are not just another commodity. To do that, and to create value for their customers in emerging digital ecosystems, banks need to create a community of developers and partners.
As the rate of adoption for acquiring all types of digital services grows, so does the need to ensure that a foundation of collaboration, trust, and transparency are established with partners and developers from the beginning. APIs should be easy to sign up for, set up, and use, to remove the friction of creating new applications and features. A real estate marketplace like Zillow, for instance, might be interested in integrating into its site a value-add financial app that lists all the homes in a particular neighborhood that customers can afford to buy based on their budget criteria. It might also provide quick mortgage or homeowners’ insurance quotes to support a more holistic house-buying experience for customers.
Of course, APIs must also be secure and compliant with with data protection and privacy regulations. APIs must enable control over data access and that authorizations place the right level of access to it. PSD2 (the EU’s revised Payment Services Directive) provides a standard API access model. This assures customer data is protected when access is granted to potential trusted third parties.
Power Up the Digital Ecosystem
In addition to providing APIs that meet and ideally exceed usability, access, and quality standards, banks can strengthen their relationship with developers and partners. They can establish API innovation hubs, host development hackathons, boot camps, and coordinate regular meetups, for instance. Relationships with the community must be actively solicited and backed up with real use cases and value models for these potential partners, too.
That said, there may be a bit of tension of expanding into an indirect model of delivering services to customers. Historically these institutions have controlled the path to customers through a direct distribution model. So, bank executives may need to overcome internal roadblocks around the idea of delivering data and value through APIs and third parties.
Finally, no bank should go into any of this without a good understanding of the importance of the technology that underpins the participation in Open Banking. Containers, distributed connectivity, and Open APIs based on a micro services architecture create the conditions for software delivery agility. Choosing the right solution will be critical to supporting the delivery of cloud-native applications that can be easily connected together and run across multi-cloud infrastructures in an automated fashion.
It’s a new era in financial services, and there’s no time left for banks to contemplate a move towards Open Banking. Now, it’s a matter of how well they will equip themselves to start down that road, and how fast they get going with crafting digital ecosystems.
To learn more about open APIs for your business, see IDC's eBook Beyond banking through open APIs.