Facing increasing pressure from fintechs, a growing demand from customers for a different way of banking and a crackdown from regulators, financial services in the UK
are heading for a massive shake-up.
One of the big regulatory changes due to hit the banking industry is the introduction of
Open Banking API’s.
In May last year the Competition and Markets Authority recommended the creation of open application programming interfaces and data sharing in order to force greater transparency for account holders and to increase competition between the banks.
But what does this exactly mean and how will it impact banks, fintechs and the public?
CBR’s James Nunns spoke to Bob Graham, EVP – Global Head of Banking and Financial Services Solutions at VirtusaPolaris to discuss the open banking revolution.
JN: Can you go into detail on what open banking APIs are exactly? What will it mean for banks?
BG: Application programming interfaces (APIs) have been around for a long time and are used by just about every company and IT department today. The API is a structured and predefined mechanism with which two systems exchange data with one another. Historically, APIs have been largely been internally focused, and when they have been exposed externally, it has been done is a very private manner, only to pre-identified partners.
Now, the shift towards open banking APIs is largely being driven by regulations and regulators like PSD2 in Europe, the Monetary Authority in Singapore and the CMA in UK, and is aimed at fostering greater competition among banks. On the regulatory side, PSD2 mandates banks to open themselves, and the accounts of their customers, to external parties. It creates two types of new market participants. The first are Account Information Service Providers, who will connect to bank accounts and retrieve information from them. The second participants are Payment Service Providers, which can initiate payment transactions directly from merchant to bank.
So in a simple sense open banking APIs mean that banks will no longer only be competing against other banks, but a potentially unlimited set of non-bank competitors offering financial services, many of which would likely be operating without the same regulatory constraints that banks face today. Effectively, the open bank API will allow for unbundling as well as bundling of traditional banks’ services by smart aggregators, whether they be non-bank competitors or other banks.
Lastly, open bank APIs offer the opportunity to disrupt traditional bank value chains by introducing new services. PSD2 will fundamentally change the payments value chain and alter existing business models. There have been some estimates that as much as 9-10 percent of retail payments revenues are predicted to be lost to payment initiation service providers (PISP) services by 2020. As such, determining how you will retain and grow your market share in the new API economy is paramount.
JN: What do banks have to do in this regard?
BG: Where you are globally dictates what you should be doing right now and the timing may vary based on where you are located.
There are really two key activities. One is for the banks in Europe impacted by PSD2 (and the work it requires) to comply with the regulation and provide their APIs. At present, most banks are relatively closed and siloed in terms of information and account data. With few exceptions, banks do not grant access to the information stored in customer accounts, and do this only for specific partners. These new regulations are requiring the banks to open up access and the cost of providing these open APIs will be borne by the banks, even though non-bank competitors may benefit from this.
The second activity, which is arguably more important, is for banks to determine what is their strategy will be in this new open API world. This includes defining how a bank will compete in the future, what new partnerships should they seek, how will it impact their current business and customer base, what it means to their current strategies, and finally what the roadmap is to achieve this. For those banks in Europe, PSD2 gives this a sense of urgency.
JN: How will fintechs benefit from these changes?
BG: Fintechs can benefit on multiple fronts. Today’s banks traditionally own their products, their distribution and their customer base and have effectively had a monopoly on their customer’s account information and payment services. While fintechs have been able to develop some innovative approaches, accessing the huge client base of banks has been a challenge, whilst getting access to a bank’s data and functionality been nearly impossible.
In a future world where access to account and data information is readily available and bank services are accessible via APIs, fintechs can construct new services that un-bundle traditional closed loop bank products and services and assemble these to the consumer base directly. This will better enable them to act independently of banks to construct these solutions, but actually could also make the banks more receptive to a potential partnership. In fact, we’re seeing some evidence of this today, as banks in Europe are among the leading investors in fintech.
JN: How does the public benefit?
BG: The overall goal of much of the regulatory approach is that, by requiring more competition, customers would benefit in terms of more choice. They receive more flexibility in how they procure financial services products and ideally, less cost due to competition. PSD2 is supposed to make payments easier and cheaper by fixing the amount banks can charge merchants for interchange fees – which ultimately get passed onto the customer.
JN: Will this realistically create a system of open banking? How quickly will the public see this change?
BG: Absolutely. PSD2 will move the ball forward in terms of creating a more open banking environment. It will encourage competition and create opportunity for new products and services.
Finalising the regulatory specifications around secure customer authentication (SCA) is complicated, and may overrun into 2018. PSD2 on the other hand will be with us by January 2018 – that’s the deadline for national governments. Therefore, customers would begin to see changes only next year as banks and non-banks roll out new features and functions subject to the above timeline considerations.
JN: Regulatory changes are often criticised for not going far enough, so how big of an impact is this one likely to have?
BG: Arguably this could be one of the biggest and most transformational changes to hit banking since the advent of the Internet, or even Glass-Steagall – as there is some feeling that payments and account information are simply the first wave of open bank API finance. As mentioned, with PSD2 the government is opening up a major portion of banks business to competition.
JN: How big a role is Regtech playing in helping players keep up with regulatory changes and to reduce the cost impact?
BG: Regtech is frequently described as the new ‘Fintech’, along with other techs like Insurtech and HealthTech. Regtech consists of a group of companies that use technology to help businesses comply with regulations efficiently and inexpensively. Financial services is a big sector but the need exists across other industry verticals.
JN: What is VirtusaPolaris’ OpenBank API accelerator offering?
BG: Recognising the need for banks to create capabilities to participate in this wider ecosystem of fintech APIs, we developed the OpenBank API Accelerator to enable our clients to introduce new features quicker and deliver leading services ahead of customer demands.
The OpenBank API Accelerator features three main components: FinTech Connect, a curated list of APIs from 50+ innovative fintech companies; Core Connect, adaptors to connect APIs to core banking systems, blockchain rails, BFS specific messaging systems; and BIAN Compliant MicroServices Blueprint for Lending, Payments & Wealth Management with more to be added.
The OpenBank API Accelerator provides banks with an ability to securely and rapidly enhance their digital offerings using an ecosystem of third-party applications, connectors and services that we have created to kick-start their API journey and ultimately build next generation digital products and services.