There is a general feeling in the market that UK Retail Banking is not competitive and the Competition and Markets Authority (CMA) can’t work out the best possible ways to reform the industry. Not a single bank is offering a compelling reason to customers to switch their current account or smart tools to manage their finances efficiently.
Well, technology is on the rescue mission here, again. We have seen how retail, aviation and telecom sectors have transformed themselves using digital technology and how insurance comparison tools helped millions of customers to find the best deals in the market. Now, it is the turn of retail banking, and CMA have decided to use technology to reform the financial sector.
CMA (with the full backing of the UK treasury) is set to launch Open Banking reform, and its Retail Banking Market Report believes it would boost much-needed competition in the banking sector. Open Banking would allow customers and smaller businesses to share their “Financial Data” securely with other banks and third-party value-added service providers (3PPs), which would ultimately bring in new market players with their innovative services.
Recently, two important events happened in financial services. BBVA Bank has launched the Open API framework, and a group of technology giants (Amazon, Apple, Google, Intuit and Paypal) has launched Financial Innovation Now to promote greater innovation in financial services. A simple question came to mind: why has BBVA opened valuable data for public use? One of the answers is BBVA’s core principle that “Data is a currency”, and Silicon Valley is well aware of this fact, outsmarting financial services through the power of their innovative business culture.
The UK Open Banking Reform, BBVA’s Open API Framework and Financial Innovation Now are the technology-driven initiatives and fuelled by an important asset, ‘Data’. Big banks are sitting on huge amounts of data which they are neither using efficiently nor letting others use. However, this situation will change very soon when UK Open Banking Reform drives regulatory changes from 2018.
Let’s understand a few API basics
So, what is an API?
It is a set of methods which allow a computer application to access methods or data of other applications and computers without physically connecting them.
Is an API a new fancy software trend?
No, the concept has been in practice for more than 25 years in various forms, and it has evolved a lot in the last 15 years, especially in Web APIs.
What is the role of an API in the Open Banking Reform?
Banks will have to build a set of APIs to share a customer’s personal account details and transactions history, and an aggregated dataset securely. New startups, 3PPs and FinTechs can create value-added services off of these APIs e.g. product comparison or credit scoring. The APIs will provide all means to locate, access and harvest a bank’s data efficiently and securely.
How would this affect the entirety of financial services?
Retail banks sit at the core of financial services, and the ripple effects of the 2008 financial crisis is an example of how banking impacted financial services and society. Instead of explaining the consequences in detail, I would like to give two scenarios to visualise its impact.
A sales executive at the age of 25 is aiming to buy a home at 35. Using the Open Banking API, he/she securely hands over financial details and transaction history from a bank to the online financial planners. The service provider would work out several ways to cut down unwanted expenses and offer an investment planning comparison tool to make the right decision to maximise the return on investment. The investment management companies would have to come up with their open API to share their product details with a transparent fee structure, to attract more customers through that online financial planner. The companies who will not integrate with the online financial planner could lose a chunk of business.
A customer of XYZ bank wants to buy a credit card from ABC bank. The ABC bank would connect to the API of the XYZ bank and access important financial details for that customer. The ABC bank would work out credit-worthiness without using costly independent credit check companies and at the same time fetch personal details to complete the application form swiftly. It shows how the bank can enjoy benefits of an Open API too.
These two scenarios show how an Open API would connect retail banks, Fintechs and other financial services entities and enable a value added service provider to produce innovative solutions. It would help customers to research and buy the best services and products to manage their finances. It would push banking and related FinServs to offer the best transparent deals to attract more customers, which would ultimately increase competition amongst them.
Open API is a bold initiative and rolling it out across the industry would be an enormous challenge (well, every regulation enforcement had been), and the Open Banking Working Group (OBWG) and banks will have to work together for the successful implementation of the reforms. Some of the challenges are below.
Program management and governance
Banks are slow moving entities, and OBWG’s timelines are quite ambitious. OBWG need to establish a governing body to oversee implementation and manage international stakeholders as well. The lessons learnt from previous, similar programs can provide valuable information to make this roll out successful.
Banks would develop the Open APIs and a countless number of FinTechs and 3PPs will use it. OBWG need standardised API authentication methods, parameterization, and API output formats and structures. The more banks follow universal standards, the less work that would occur during the integration process. A lot can be learnt from similar practices currently operating in the market e.g. Insurance comparison service providers.
It is one of the biggest challenges. The private data will be shared and used (in some cases stored) by 3PPs. Banks and service providers need to ensure the security of their platform and API. Hackers can exploit any API vulnerability and get access to the data and infrastructure. The customers also need to be educated on data privacy too. A lot of these data security concerns can be resolved using existing technology, but FinTechs will need to come up with innovative ideas to earn customers’ confidence.
Monetization and revenue sharing
Banks are investing in API development whereas 3PPs enjoy the benefits of it. Banks, FinTechs and 3PPs jointly need to work out a business model to make this initiative more attractive and mutually beneficial. It is a perfect opportunity for banks to develop an alternative revenue generation model through the API. Banks can charge 3PPs per API call, as per data type or come up with an API subscription model. There are many ways to monetize the opportunity for collateral benefits.
So, the Open banking reform is a perfect opportunity for banks to create an alternative revenue stream and work alongside FinTechs to stay relevant in the digital economy. There are many bright minds, startups and FinTechs working tirelessly in Silicon Valley and beyond to find alternatives to traditional banking, and banks will have to evolve themselves to face the challenges successfully.