It is common to see the term “Open Banking” in the industry trade press but is this an area where financial institutions should either be looking at or starting to make investments in? In this post, I will explain what Open Banking is, why becoming an open bank is important and how banks should be starting the process of becoming an open bank.
Open Banking is defined “the ability to allow access to customer accounts through 3rd party applications with the consent of the customer”. An example would be allowing a 3rd party mobile wallet application to access and transact with that data residing at the bank. Why would a bank want to do this and potentially run the risk of becoming the backend plumbing for a Fintech dominated environment? Is giving a 3rd party application access to “your” customer data a good business idea? There are a number of reasons why banks need to be closely looking at this.
First, if you are or do business in the European Union it is now a directive. PSD2 (the second Payment Services Directive) and more specifically the Open Banking effort in the UK requires the nine largest banks in the U.K. to release their data in a secure standardized form only if the account holder provides explicit approval. This is intended to enhance competition in the financial services industry, a trend we will continue to see grow worldwide.
Second, this will likely become a required part of doing business in the financial services industry. With changing demographics, banking customers are becoming more comfortable using 3rd party Fintech providers or even social media apps to perform financial services transactions. Much of this is already taking place with applications such as Venmo, Facebook Messenger, etc. Currently, in order to use these existing tools, customers register their debit account information and these tools leverage the existing payment rails including the ACH network which settles over a period of days. Direct payments by elimination of the merchant acquirer and Visa/Mastercard will also drive down the cost of payments. The industry needs to move to instant payments and move off legacy payment rails. There will be a significant revenue risk for banks if they do not embrace these new payment models.
Third, banks understand the payments business and have the back-end systems in place to facilitate payments in a secure regulated environment. Investments made in Anti Money Laundering (AML) systems and fraud capabilities can be leveraged at greater economies of scale to support this ever-growing market. Banks can also leverage the data used to provide actionable insights or monetize the raw data. The insights from this data allows banks to provide more personalized services to their account holders.
Banks can also leverage their use of customer data to provide new and enhanced customer experiences. Examples include digital payment providers or even partnering with retail providers. Banks can also choose to become a supplier and provide white label offerings to Fintech providers and digital only banks providing a new source of revenue.
Where to start:
Banks choosing to open their customer data will need to create a new or leverage an existing secure integration tier to mediate the incoming requests from the customer data in the back- office transaction processing systems. This mediation tier will need to be able to transform, route, orchestrate and provide potentially metering and billing capability doing all this securely and at scale. Ideally these requests will leverage industry standard formats and protocols. Although the financial services industry has traditionally been a laggard with providing a consistent set of messaging standards, some standards do exist and industry consortium groups are driving standards. Regardless of the messaging format, the mediation tier will transform the message formats facilitating the required integration. HCL Integration Platform (HIP) can provide that integration tier allowing a bank to begin the journey to becoming an open bank with the Financial Payments Pack which provides out of the box integration with the most common financial services message formats.
HCL Technologies and HCL Software have both the skills and tools to help you begin the journey to move to open banking.