Blog.
Open Banking is here!

April 4th, 2018.

What it is

Open banking is a secure way for you to use financial products and services from regulated apps and services. As a financial services term and part of financial technology, it refers to the use of Open APIs (often also referred to as public API – publicly available application) which enables third-party developers to build applications and services around the financial institution. Also, this allows greater financial transparency options for account holders ranging from Open Data to private data using open source technology.

The aim is to encourage innovation and improve competition, by making it easier to hold multiple accounts and compare or switch financial products. For now, open banking only applies to personal and small business accounts, although it will be extended to cover other online payment products, such as credit cards and e-wallets, throughout 2018 and 2019.

How will this impact us

Ultimately, it could allow the management of all financial accounts and household bills through a single digital platform, with the option of allowing apps to ‘plug in’ and offer more personalised and intuitive services.For example, an app might help to avoid charges or boost savings by automatically moving money between various accounts. Open banking could also spur action in other markets, by encouraging the consumers to look at their energy or phone bills. It will help the speed in which we apply for financial services online.

Traditional financial services get more digital

Incumbent banks are now reacting to the challenges they face from Fintechs and other digital-first players – by investing huge amounts in improved digital capabilities such as apps, chatbots, AI and APIs to help provide a highly personalised, engaging customer experience. The traditional banks also realise the potential benefits of partnering and collaborating with Fintechs, rather than trying to stop them in their tracks. This will be further encouraged and facilitated by open banking.

The development of open APIs and other tools and technologies will help deliver more customised and cross-device payment experiences to achieve the personal touches that millennial customers crave. Increasing open API capabilities will enable financial institutions to both provide and access new sources of data which in turn will facilitate targeted and personalised services to help customers better manage their lives as well as their finances.

According to Forbes magazine, open banking is in the top ten emerging trends for 2018 to keep track of. The wave of expansion is starting in Europe, where new regulations are forcing European banks to open certain banking services to third parties. In other markets, like the U.S., a move toward open banking is coming from fragmentation of the traditional vertically-integrated bank value chain.

According to Reuters, HSBC, Lloyds Banking Group and the Royal Bank of Scotland are at various stages of producing cutting-edge apps that will allow customers to pull data from different accounts, even those at rival lenders, on their mobile devices and home computers.

In March, Open Banking continues to be a hot topic in the news. Many prominent online media outlets like Global Finance Magazine (www.gfmag.com), Forbes magazine (www.forbes.com), Fintech (internationalbanker.com) have provided the latest insight into the open banking industry.

As of March 6, 2018, Britain's biggest building society, Nationwide, has advised its customers about its support of open banking, which has many emerging benefits, such as tracking of account balances and interest charged to save money and seamless management of bill payments online by giving access and authority to the banking institutions. The safeguards mentioned in the article are both revolutionizing and reassuring to the user. One of the key measures ensures that all third-party providers (TPPs) have to be approved by the Financial Conduct Authority (FCA) before they can appear on the Open Banking Directory.

According to Internationalbankers.com, the combination of new legislation (Protection regulation that comes into force in May 2018 and the current trend of digitalization will threaten the traditional bank payment revenues and customer relationships.

The margins on payment transactions are getting squeezed and diminishing. As digital services will become more popular, physical bank branches will become less relevant. New market entrants such as Monzo in the United Kingdom, N26 in Germany or Simple in the United States have managed to occupy significant market share by delivering consistent levels of digital services. Their share of the market will improve their stability.

Large banks have serious intentions to make big investments in Open banking. The number of mobile bank users is likely to almost double from 17,8 million to 32,6 million by the end of the decade. Established financial institutions that can adapt at speed will find a place in the industry. Those, adopting the wait-and-see approach are threatened to be replaced by the market.

According to Global Finance, Security and speed, the two key trends in the market, are not very compatible. According to Lothar Meenen, global head of corporate cash-management sales at Deutsche Bank “As open banking matures over the next 12 to 18 months, forward-thinking corporates will be able to realize significant cost efficiencies or even unlock new revenue streams.” He thinks this might benefit small to medium-sized companies, which are late to embrace cross-border cash-pooling solutions. He also states “We must continue to enhance our existing solutions that are working well today but continue testing new technologies and solutions with consortiums, with other banks and with Fintechs. By always testing in a financial ecosystem that includes banks, clients, regulators and Fintechs, together we are constructing the future by transforming transaction banking ... I believe it will be completely different in the future.”

According to Forbes, a survey of more than 4,000 UK banking customers conducted by Bain, Salesforce and MaritzCX shows that big banks have reason to be concerned about open banking. 63% of bank’s most important customers are willing to share their financial data from their accounts with other financial or nonfinancial institution and or a Fintech in pursuit of a better deal.

The market share of traditional retail banks will be replaced by digital online banking services using open banking technology.