The combination of rapid technology innovation, cultural and behavioural shifts, and new financial regulations are transforming the banking sector at a speed that is unprecedented. This presents significant challenges for incumbents, together with profound opportunities for banks to renew and transform their service offerings to meet the high expectations and demands of their corporate and personal customers.
“Open Banking is enabling some very innovative solutions to be built using its access and data principles. It is reducing manual processing and making corporate banking more transparent and easier to report on. Think more visibility into transactions, new ways to improve working capital and reduce unallocated cash – and importantly how to do all of this without having to completely overhaul existing treasury and cash management systems. Crucially, corporates can now also truly choose the solution (or solutions) that works best for their business, whether that be from a bank or from a non-bank provider.”
APIs and Overlays
Armstrong adds that while technology is what makes Open Banking work, it’s APIs and Overlay services that will have the most impact.
“APIs are driving the how of Open Banking,” he explains. “How non-banks get access to the data they need to deliver on their product promises. How banks can connect more easily with their customers and technology providers and how everyone will benefit from new products and services created under the Open Banking banner, without APIs no one will have the data they need to provide these new solutions. Overlays are just as important as the idea is to enable companies and banks to adopt new technologies, that deliver previously unavailable benefits, without having to completely re-engineer existing systems.
“Take the payables / receivables process for example. Today’s payment channels, receivables matching systems and ERP systems still struggle to carry settlement data with clearing and remittance data from the buyer initiating the payment, all the way to the supplier. An Overlay, that connects via API, can essentially sit on top of all of these systems and link them up both inter and intra-company, carrying the data they need to augment the process.
“Blockchain can play a role here too—as it suits Overlay services really well and adds a layer of auditability and shared trust that makes reconciling incoming payments and reporting on them, a lot easier.”
Continuing the discussion around APIs, Parth Desai, CEO and founder of Pelican, adds: “APIs will play a key role in corporates connecting to their banks and they will enable corporates to finally get the full end-to-end benefit of real-time payments, rather than the current model where the ‘instant’ part of real-time schemes sometimes remains the preserve of the inter-bank space.”
Another key technology offering, says Desai, will be AI. “Greater access to data will allow a multitude of AI technologies to play a meaningful role. Industry leaders in AI can offer a host of such solutions including intelligent payments management across the entire payments lifecycle with industry-leading levels of efficiency.
“Advanced risk management and compliance solutions can harness the AI disciplines of machine learning and natural language processing to deliver comprehensive sanctions screening, AML, transactions monitoring, and fraud prevention capabilities. Technology can also automate bulk payments, reformat and route payments directly to clearing banks and networks.”
Transformation today or tomorrow?
It’s clear then that the API connectivity layer and AI will be transformational forces within this space and will allow nimble corporates who understand and harness AI technology within the Open Banking ecosystem to emerge as true winners. It’s worth pointing out that this isn’t some kind of future pipedream either—we’re talking short-term here according to many in the sector. In fact, Desai says that real-value for corporate use cases is likely to start emerging in around 12 – 24 months’ time.
However, Dr Gavin Scruby, CIO of SmartDebit has a differing view that suggests real, meaningful change may still be a way off—and regulation may play a part in pushing it forward. He also says that we need to be careful about the true interpretation of Open Banking.
“It’s important to define what we mean by Open Banking, because there are now different interpretations. The first and most well-defined version of Open Banking in the UK is the CMA mandated set of requirements to open up the market by forcing big banks to make account and payment services available by API. This is designed to be compatible with the EU PSD2 directive. Marketing teams have been, as ever, hard at work piggybacking on this though, as it has been touted as a revolution in innovation.
“As such, we now have a completely different notion of Open Banking that means making banking services that are “open” to others and newly-digitized through APIs. We can call these CMA Open Banking and conceptual Open Banking. It’s all further complicated by the fact that other countries are implementing their own CMA type Open Banking frameworks, which are slightly different in scope to the UK’s.”
The reason it is important to differentiate these, according to Scruby, is that the impact it will have depends on whether we mean CMA Open Banking or conceptual Open Banking.
“CMA Open Banking will have little impact on vast and complex financial instrument aggregators such as treasury management suites. They already have routes into most payment types and banks that they need already—hard won over time. CMA Open Banking is much more limited in scope (right now just consumer accounts), and different in each country, so many of the traditional integrations will still be needed.
“What is happening is that banks and institutions are feeling the heavy hand of regulation hovering over them. They feel that the CMA Open Banking standard is just the first phase of pushing them into public digitization. This feeling, along with the drag from customers who increasingly expect new services to be online and standardized is fueling the conceptual Open Banking boom. This “version” of Open Banking will very much affect treasury management, as new services supercharged with AI and blockchain, and supported by cloud scalability become the norm.
“Whether this will be enough to allow FinTech’s and new players to enter the market is debatable; so many traditional integrations will still be needed that such innovators may well just occupy niche positions for years to come. Additionally, given that the CMA Open Banking standards will vary across different countries, suppliers will still need significant resource to provide a full multi-national solution.”
From innovations in cross-border payments, the global adoption of new instant-payment infrastructures, to the growing expansion of OpenBanking and API connectivity models, our industry is changing at an unprecedented velocity.Regulatory mandates are playing an important role in driving this transformation. Beyond PSD2 in Europe, schemes or initiatives are underway globally, including in the US, Australia, Hong Kong, Singapore and India.
So how are banks facing up to the challenges and new opportunities presented by Open Banking and broader market changes? A recent study of 160 international financial institutions by Accenture provides interesting insights into the digital transformation strategies of banks globally. Despite investment of over $1trn over the past three years, most banks have focused their technology expenditure on cost reduction initiatives, with seemingly few investing significantly in new service offerings or seeing an increase in revenue generation.
Of the 160 banks surveyed, only 12% have a fully developed digital transformation strategy, with half making relatively little progress on transforming business models or service propositions. A full 38% are still developing the right approach or have a transformation strategy lacking coherence. It is not surprising that Accenture concludes with the recommendation that banks need to look beyond simply expending more on technology. They advise refocusing attention towards investment that drives ‘innovation and new business models’, developing the ability to add ‘new services that customers are willing to pay for’ in order to remain relevant and generate new revenue.
Investing beyond compliance
In an Open Banking context, the objective should be very clear. Of course, the regulatory mandate for banks to develop secure and scalable Application Programming Interfaces (APIs) that enable the consensual sharing of customer data to Third Party Providers (TPPs) remains obligatory.
Beyond a compliance and a ‘business as usual’ mindset however, an increasingly attractive transformation path is for banks to become TPPs themselves, to create new products and value with a consumer focus that can match any offering by a shiny and innovative new challenger. PSD2 represents a significant pan-European opportunity for banks as a TPP to connect with 500 million potential new customers. By registering as a TPP and offering a central platform where account information or payment instructions can also be communicated to and from other financial providers, together with offering new and hyper-personalised service capabilities, banks not only cement their relationship with existing customers, they provide an attractive proposition to grow market share and generate new revenue.
Most banks have already introduced some basic multi-bank capabilities to their own mobile banking applications, enabling customers to see an overview of their financial health and allowing for better decisions when it comes to spending and investing. Likewise, through shared account information, banks gain a better view of their customers’ needs when it comes to designing tailored and personalised services.
API fragmentation challenge
In developing rich ‘TPP’ capabilities, banks must overcome many obstacles. Not least, the fragmentation of API standards across Europe.
When banks are simply responding to requests from other TPPs, they are able to dictate the API format that others need to use to communicate with them, as long as they meet the requirements as defined in the Regulatory Technical Standards (RTS). In this respect, banks maintain some control. As a TPP however, banks relinquish this control. Like any other TPP, they too will have to reach out to the 5000+ banks in Europe, and cater for the different APIs which those banks publish. It remains unclear how many different APIs will be issued, but already we have a diverse range of country, region, or bank-specific APIs in operation. By mid-2019, around 140 European banks have so far published their own APIs.
How can banks acting as TPPs overcome this API fragmentation challenge in order to reach the large pan-European market?One clear strategy lies with the deployment of an API interoperability hub. By using an interoperability hub, any bank choosing to offer TPP services can undertake the translation and aggregation of many different APIs. The bank themselves can use a single API format of their choice, with the hub seamlessly handling the API conversion and connection processes.
An interoperable API hub approach also delivers considerably improved efficiencies and operational simplification for the bank acting as a TPP. In addition to API format standardisation, a comprehensive hub should also be able to centralise and handle complex security and financial crime compliance obligations, such as transaction risk analysis (TRA) and fraud reporting —essential requirements in managing the connectivity of multiple APIs under PSD2.
An interoperable API hub can play a central part in enabling banks to focus on their core service propositions and their customers’ needs. Our industry boasts a strong history of innovation. With the right strategy and approach, today’s open-API and real-time economy presents enormous rewards for those banks that embrace—and deliver—on today’s innovation imperative.