An open letter to bankers… On conspicuous benefits of Open Banking

Had Ali Baba been a banker in 2021, had he wanted to open the door to digital banking, his encrypted exclaim may still be “Open Sesame.”As is often the case, the name, label or tag accorded to the ongoing transformation in Banking is easy on the lips yet understates the potential.

by Indranil Basu Roy, Chief Business Officer, Modefin 

Hark back to a time when mainframes gave way to the personal computer, yet not much importance was given to the term “PC.” Look at where we are three decades later in personal computing.

Or remember how COBOL and FORTRAN foretold the dominance of “software.” Application development has now advanced to AI and ML, with voice commands programmed to play our favourite OTT show, type as we talk, or stream as we walk.

Back to the fable and the veiled allegory of a treasure cave. Technology has put on the virtual table a banking platform so vital and strategic that everything else seems small change.

Its name: Open Banking. Objective: Bringing together data, processes, and business functionalities of banks, FinTechs, and third party providers. Ultimate Objective: Transformation in Banking Services:  Limitation: None. Opportunities: Many.

The lucid or eloquent definition of Open Banking is the same, whether you are a dummy or techie. Here we go with three, not mutually exclusive but complementary:

• A platform designed to nurture openness, information exchange and transparency.
• A customer-centric configuration (as opposed to product-centric) that creates new solutions or enhances existing offerings by integrating an Application Programming Interface (API) and datasets.
• An alliance between banking institutions, FinTechs, and third-party aggregators for developing or infusing agile applications.

How does Open Banking work, especially in a digital world where the inherent promise is privacy and security? Well, for starters, the opening up of financial data is done only with the customer’s consent, with the flexibility to manage or cancel the access.

An elementary example of Open Banking is a third-party mobile wallet that you have installed on your phone. With access permitted to the bank account (by the user), the wallet replaces net banking by providing most services at the touch of an icon (QR code payments, P2P transfers, utility payments, EMIs, and more). In short, you can now bank without logging in to your bank account.

Here are five scenarios to illustrate the benefits of Open Banking to the financial services industry and the end customer:

• Data aggregation by a third party aggregator from bank accounts, such as spending habits, investments, or credit history – this will help the Bank offer a personalised wealth management tool for the end customer.
• Enables third-party credit providers to offer instant credit and execute immediate remittance, whereas earlier the process would be time-consuming and procedure-driven.
• Relevance and Personalisation – with APIs serving as a window to preferences, banks can generate personalised offers and provide relevant value adds such as loyalty rewards and financial education.
• Banks and fintech can co-exist rather than compete. Data-sharing agreements with FinTechs and other non-financial companies can open the door to newer and more agile services.
• Very soon, technologies such as voice assistants and augmented reality will be part of the bank’s digital interface. Banks can work with FinTechs to enrich the customer journey in this emerging space.

End of the preamble, parable and all other rambles. Let’s move on to an overview of the origin of Open Banking.

It all started with countries and governments realising digital banking is not just an enabler but a juggernaut that needs to be constantly fed with innovation. Taking cognizance of new-age solutions being launched by FinTechs, wary of their momentum from the periphery to mainline and capability to offer services akin to a bank (such as online lending or deposit creation), and appreciating that the trickle-down effect or financial inclusion is best achieved through collaboration rather than regulation, various governments began to “open up” banking.

While referred to as regulations, in reality, the promulgation from the helm of the financial realm, such as the apex bank of a country, tended to favour information exchange and APIs, the primary technology that facilitates account holders and the financial institutions to share data with 3^rd parties. Australia’s Consumer Data Right Legislation permits Accredited Data Recipients (ADRs), on behalf of a customer with the customer’s consent, to collect and use data held by a data holder to provide a specific product or service.

In the European Union, banks are legally obliged to facilitate access to account information through APIs, per the Revised Payment Services Directive (PSD2). In the UK, The Open Banking Implementation Entity (OBIE) creates software standards and industry guidelines to drive competition, innovation, and transparency in retail banking.

Well ahead of Open Banking initiatives, India has launched in the last decade landmark measures such as the creation of a unique digital identity for every citizen (Aadhar), enabling access to banking services for unbanked households (Pradhan Mantri Jan Dhan Yojana), and launch of Unified Payments Interface (UPI).

From an Open Banking perspective, such progressive steps in India have increased “interoperability” and created greater avenues for data sharing in the financial services sector. For example, Account Aggregators (AA) are authorised to enable financial data sharing from Financial Information Providers (FIPs) to Financial Information Users (FIUs), based on consent from customers.

Around the world, Open Banking has come a long way from the build and design phase. Unseen, unsung, and by that, I mean underestimated, it has arrived and is here to stay for the greater good.  As a representative of the FinTech sector, a key constituent of the digital banking ecosystem, here are my pointers that will help banks embrace Open Banking.

1. Do not view Open Banking as a solution; it is a platform, like a chassis around which parts of a vehicle are assembled.
2. As a Digital or Challenger bank, your goal is omnipresence – the ability to be present at every customer touchpoint. Make sure every product or solution in this journey is more like a Lego block and not a silo on the open banking platform.
3. If a traditional bank, do not fret over disruptors. By adopting Open Banking, you too can create greater stickiness, retain customers, and even onboard Generation Z.
4. Being a nascent and evolving practice, Open Banking cannot be created or delivered as a standard application. Talk to an evolved fintech provider who can create a customised platform.
5. Take a strategic approach first: Consider how to build a business model that maximizes your position in the Open Banking value chain.
6. Next comes the implementation of the application network connected by APIs – decide if this will be on-premises or in the cloud, developed in-house, or acquired from a fintech provider.
7. Look upon Open Banking as a holistic business transformation plan. If your strategy is defence, you will end up being reactive. The moment you set up an open banking platform, you are on the offence and you have the opportunity to offer greenfield services that will delight your customers and take the competition by surprise.

Time to end my open letter. In the final analysis, banks that resist change, desist from collaboration, or postpone migration, will find themselves forever at the entrance of a treasure cave. Those who have done too little and too late, and thereby fail to unlock the potential with “Open Sesame,” have themselves at fault.