Open The Bank Windows, Please
DataQuest|October 2021
Open banking is like a Pandora's Box that opens up many questions and disruptions, which both banks and their fintech neighbours need to face
Pratima Harigunani

There are actually some countries where a five-or six-year-old kid can get a veterstrikdiploma. Yes, a certificate for tying shoelaces - successfully.

This utmost basic and silly sounding skill can, however, matter a lot for the not-so-five-or-six-year-olds in businesses that are facing disruption. After all, they have been sitting on armchairs and well-earned comfort zones for many decades now. To run the race that tech giants and fintech natives challenge them to, banks would need to tie their shoelaces fast and tight for sure.

But there is one knot that would be hard to master. Not because of difficulty but because of visible hesitation and under-the-surface complication. Some of us know it better as the oxymoron called 'open banking'.

And yet, it is becoming a future paradigm of sorts powered by new competitive and regulatory dynamics. It is where banks can use APIs (application programming interfaces) or any such models that help them connect easily to the entire ecosystem - which, of course, includes third parties and fintech players. Ostensibly, this can be just that tunnel that helps banks expand their reach and scale. Or help them serve their customers with lightning-fast speed.

For fintechs, it can be just the road they needed to connect to the big city that houses customer data. They can make their hops for delivering what they deliver again without friction and with better personalisation. It should help them with the biggest challenge they face. Fintechs, ideally, try to provide visibility to customers, which is real-time and granular. But most banks do not allow the connections to happen or the bridges to be welded. Some fintechs that do not have the API capability - that open banking would provide - end up using native integrations or tactics like scraping from websites.

So, is open banking a convenience for customer or a data risk? Can fintechs survive without reliable, secure access to data that have permission for sharing by the consumer and APIs? Can they be assured of the security and transparency that such an environment would demand from them? Also, what about the legacy banks? Is it the future they should open themselves up to, or a competitive onslaught they should find a way to beat? Or ignore?

THE PRO-ARGUMENT

It's not as if all banks are against this concept. A recent Finastra report shows that banks and financial institutions (Fls) do believe that open banking is providing a tangible impact in delivering an improved overall customer experience. About 86% are looking to use open APIs to enable open banking capabilities in the next 12 months. As to the overall percentage of Fls looking to leverage open APIs, the United States showed 92% (a jump of 23%), the United Kingdom exhibited 85% (up by 17%) and Singapore was around 87% (better by 1%).

In the Global Open Banking Report 2020, we can see that (traditional) banks need some steps to open up and innovate as they tap the opportunities brought by open banking. As per an Accenture report, traditional, vertically integrated banks will need to become what they've never been before: savvy bilateral traders. So, the ones that treat open banking as a strategic growth priority will position themselves to deliver digital experiences that customers want and boost revenues by 10%.

Looks like banks will have to choose between catching this wave and riding it out – and quickly since as much as USD416-billion in revenue is at stake! The report also augurs that open banking will arrive at different times in different markets, but when it takes off, growth will likely be rapid. Those who belong to the box of sceptics will be, probably, left behind. When the wave arrives, the change is expected to be exponential. This is being echoed in the rapid growth of third-party providers (TPPs) in Europe, a place that is at the forefront of the open banking paradigm. The report points out that the number of TPPS has grown from around 100 to more than 450 in under two years. Also, their focus has expanded from payments and transactional retail banking to encompass the entire financial value chain.

As to whether APIs and open banking platforms make sense for traditional BFSI players, Ramesh Mallya, Head of Technology – India, DBS Bank, opines that from the customer's view, they are a great benefit. Competition fosters creativity, innovation, and better service conditions. As we have observed across all spheres of human activities, financial operations have also become highly automated, mobile, and flexible. The financial sector is becoming extremely competitive with software developers, e-commerce players and many more entering the BFSI sector and sometimes even changing the rules.

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