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Successful financial institutions understand the importance of providing exceptional customer experiences. The ability to delight customers comes from creating personalized solutions that anticipate a customer's needs and are available whenever the customer wants. Open banking may provide the perfect opportunity for financial institutions to redefine and prioritize the value they bring to their customers.
Open banking is defined as ‘a system that provides a user with a network of financial institutions' data through the use of application programming interfaces, better known as APIs'1. Forthcoming regulation in the EU, in the form of the revised Payment Services Directive (PSD2)2 is one of the drivers sparking the popularity of open banking. PSD2 is the second Payment Services Directive, designed by the member countries of the European Union. The new rules enhance consumer protection and aim to promote the development and use of innovative online and mobile payments. This could represent a significant step towards banking-as-a-platform (BaaP), as it includes provisions that enable account access by third parties via public APIs.
API-enabled open business presents an opportunity for innovation and may pose a threat for those who hesitate. Open banking offers tremendous potential for financial institutions to innovate at pace, create new revenue streams and disrupt the disruptors. Financial institutions who are willing to think differently could find new ways to increase digital revenue through technology innovation based on impeccable products and data analytics. For more information, please watch our webinar "Using APIs for competitive advantage in the banking sector"
PSD2 has to be put in place by national legislation of all EU member states by early 2018. If this occurs, then the banking industry would need to comply eighteen months after adoption, so mostly likely sometime in 2019. Since the directive will require financial institutions to provide API access to customer accounts, most will find this will require significant investment in application service governance and API management. This may be particularly challenging for financial institutions that have a long history of mergers and acquisitions or are burdened by legacy infrastructure inherited from pre-digital era. If this be the case, they may not be ready or able to fully adopt microservices and DevOps practices. The good news is, that containers offer an ideal solution for these financial institutions to begin modernizing their applications to reduce costs, speed maintenance time, and prepare for a future DevOps environment.
Another significant challenge to leveraging the possibilities for innovation could be the fact that there is currently no standardization in API design, which can hinder developer experience and increase time-to-market. The lack of standards could potentially impede innovation. The current inconsistent manner in which APIs are implemented could slow decision making and impose inefficiencies on IT departments. The sooner that standards are agreed upon for authentication, encryption and protocols, the more quickly technology innovations will be brought to market.
In reality, PSD2 is just the latest in a long line of initiatives that are putting pressure on banks to transform the financial sector into a more "open and equal market." Refreshing core banking systems, developing digital capabilities, and responding to previous legislative mandates have imposed historical challenges to financial institutions.
APIs are becoming more and more essential in the digital transformation journey of financial institutions. By using APIs, banks can become more agile by adopting a more modular and reusable system design. Increasing the use of APIs could also have a positive effect on business development as partner collaboration can potentially be executed faster and more effectively. The open nature of APIs could foster creativity, increase the rate innovation, and give developers the ability to build something unique.
Financial institutions could also use the open API platform as a way to increase brand awareness. Through the sharing of APIs, the brand could be used in many different, potentially new, contexts. If third parties integrate with a financial institution's API, there may be an agreement put in place that this third party displays the bank's brand.
The fine-granularity and flexibility of APIs may also open the door for entirely new revenue models. APIs allow financial institutions to expand into markets they may never have previously considered. With this potential growth, it will be critical for financial institutions to strategically implement an API management layer to better secure, control and monetize data access; and to build ecosystems based on compelling developer experience. Red Hat 3scale API Management provides better security for, and makes it easier to share, distribute, control, and monetize, APIs.
While PSD2 will be a driver to some degree, we expect that open banking will become the accepted future operating model. Financial institutions should keep an eye on what happens with the process of adopting legislation to implement PSD2 by the EU member states. It presents a huge opportunity for financial institutions to collaborate with one another and with the growing fintech ecosystem. We predict that those who will thrive will not look upon PSD2 as an obstacle but, rather as an opportunity.