In times known by Cambridge Analytica, fake news, and disastrous data leaks, would you agree to share your financial info with third-party users? Well, in 2016, Accenture published a study focused on customers’ reactions to PSD2. 85% of respondents aged 18 to 25 years mentioned that they trust third-party processors to aggregate their data…  While it may sound odd, people are confident in reliable and secure solutions.

Modern banking isn’t a cakewalk. Today, FinTech startups introduce innovative technologies and customer-focused strategies while traditional banks can rarely keep this pace. Assertive market players disrupt the industry. Moreover, governmental and international regulators reveal new requirements. Banks have to prioritize innovations and openness. We realize it thanks to dozens of successful dev projects for finance teams.

Thus, how a regular banking enterprise can evolve now? One of the best approaches combines compliance with regulations and implementation of smooth customer-centric tech. It’s possible thanks to the idea of open banking. Let’s learn what is it, how it works, and how your bank can become truly open.

Open banking era

14 September 2019 was the final day for EU financial organizations to comply with PSD2 regulatory standards. Europe entered the new cycle. But what does it mean? Overall, the main conclusion is pretty simple: from now on, all banks are obliged to provide the customers’ data to third-party FinTech firms. Obviously, this rule doesn’t violate GDPR so initial consent of every client is required.

Generally, the concept refers to three main points of openness:

  1. Open data. A customer-side aspect provides for perfect transparency of personal accounts, funds, money flow, and interactions with providers/processors.
  2. Open development. The previous feature is available thanks to the use of open APIs that allow developers to design new services for banks’ customers.
  3. Open-source tech. Both points mentioned above can’t exist without clear and available-for-everybody development technologies.
Open banking concepts

You can find more info at the official UK platform dedicated to open banking.

What are the main components?

To understand the conception, it’s better to start with the most basic parts. Open banking development began in far 2001 when the first European experts started working on PSD. The initial document was presented in 2005. However, only the second variant called PSD2 introduced the real open banking rules and objectives, e.g. online and mobile innovations.

After this, the UK headed the development of postulated ideas. EU countries joined this initiative because they were obliged to do it by the European Parliament. Other states like Ukraine make some changes to move closer to the European financial area. But the basic elements of this evolution are similar:

  • Application Programming Interfaces. Or just APIs. These solutions work as the main tech basement that ensures proper interaction between different systems. Bunks must provide open APIs for developers who then build or connect apps.
  • Open Banking Remedy. The list of propositions and requirements posted by the UK-based CMA to nine the biggest British banks. Mainly, remedies require these banks to provide licensed startups with access to transactional data. 
  • Payment Services Directive 2. The second iteration of European paper in the field of innovative banking. Particularly, PSD2 regulates online and mobile payments, new forms of payment services, and money transfers to and from the EU.
  • Strong Customer Authentication. Additionally, PSD2 includes SCA requirements. According to them, digital transactions must be verified with at least two unique customer features: knowledge (PIN), possession (card), and inherence (biometrics).

In addition, other components and innovations can be used within the strategy. For instance, banks can adopt blockchain and utilize cryptocurrencies for higher decentralization. However, it’s important to remember about regulations. Extra technologies can be difficult to implement because of the lack of laws/industry standards.

Open banking parts

How does it work?

Now, let’s dig deeper to understand how the strategy works for banks, FinTech groups, and regular users. For higher competitiveness and greater customer satisfaction, financial companies will be able to quickly emerge, get access to data, and connect to users’ accounts. The majority of these accounts belong to large traditional banks. Yes, open banks.

Being regulated by PSD2 and CMA remedies, banks must deploy APIs and open access to data. As a result, all parties get new opportunities. Banks will be able to share their product/service info and compare it to competitors’ stats; startups will deliver more convenient services through banking infrastructure; and users will get control over their data.

Do you know how the App Store and Google Play work? They are platforms that allow external devs to create and distribute applications. Thanks to the open banking concept, banks can turn into these platforms. They will provide the tech basement and the audience to developers of FinTech services.

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Advantages of open banking initiative

Apart from obligatory implementation for European banks, open banking concept comes with a few significant benefits. Means, finance companies around the globe should consider working on this idea. Data related to APIs’ performance shows that more and more companies introduce these solutions making them more available and efficient. July 2019 presented the record-breaking number of successful API calls: more than 80 million!

Open banking stats

The most prominent benefits for banks, startups, developers, and regular customers are as follows:

  • Aggregation. Removes data silo by collecting key information at one place. All parties can access the allowed sections, e.g. users see their transactions while developers can use advanced insights for better targeting.
  • Analysis. This point is better for enterprises. By using advanced analytical tools + visualization, it’s easy to understand clients perfectly. Simultaneously, clients also can analyze their money flow.
  • Automation. By utilizing APIs, banks open a new world of opportunities for developers. Particularly, they can create various applications focused on automation: bots, analytical systems, monitoring platforms, etc.
  • Loyalty. It’s pretty obvious: when a bank creates an ecosystem for developers and users, they tend to stick to this bank. Like Apple creates a whole world of own products, banks can start with the App Store analogs to boost loyalty.
  • Speed. Modern software programs are several times faster than humans. Via open banking strategies, new apps can speed up analysis, product/service distribution, response to issues, and more.
  • Transparency. Finally, we return to the beginning. Data gathered in one place and systems with proper access levels result in high transparency combined with privacy. Thus, clients see the banks’ operations while companies handle KYC/AML better.

There are numerous banks with working open APIs today. Wells Fargo is one of the most famous ones. The company utilizes APIs to provide devs with access to customers’ data. Thus, affiliate firms like Xero or Intuit can create bespoke services and apps for clients using secure connections and powerful infrastructure. APIs also allow to get rid of unsafe screen scraping methods and switch to innovative ways of data sharing.

Open banking monitor 2019: Winners and losers

To evaluate banks and other financial enterprises, let’s look at Innopay – the firm behind the Open Banking Monitor. This tool allows comparing banks in terms of API development, open portals, and customer focus. Researchers break participants into four groups based on two scales: scope and experience. The top right segment includes top leaders while the left bottom part is reserved for newcomers. In total, there are 55 companies.

Further, we will talk more about the most successful banks in terms of openness. As for now, it’s worth to mention that progress is almost impossible without strategic tech partnerships. Banks can’t compete with startups when it comes to technology. Thus, by cooperating with dedicated dev teams, they boost their evolution. Needless to say that our company is ready to help by designing API solutions, customer portals, new apps, and services.

Top-rated banks by openness

Let’s start with leaders. In the top segment, there are famous names such as BBVA, DBS, Citi, and ERSTE. However, 2018 year showed that a lot of companies are ready to evolve. Despite not of them are in the highest tier now, we want to show three game-changers:

  • OCBC. After DBS, OCBC is the second enterprise by API scope richness. Last year, the team introduced several new interfaces, e.g. for requesting credit limit increase and for efficient off-boarding. Soon, this bank can enter the top tier.
  • Capital One. On the contrary, Capital One is in the second place by experience together with BBVA and after Nordea. It lacks scope but focuses on the highly-collaborative API ecosystem. It also focuses on secure identity APIs.
  • Nordea. Here’s the leader in experience. While Nordea isn’t the best bank in terms of scope, it’s a productive and effective corporation. With its new API for instant reporting, the bank can provide real-time info with no hassle.  
  • NBG. Being one of the most balanced companies in the list, National Bank of Greece is the full-fledged master in openness. It presented various APIs last year: for biometrics-based KYC and for crowdfunding.  
  • ERSTE. Being another member of the top right segment, ERSTE introduced a number of improvements to the sandbox environment. Now, developers can test authentication methods, data processing, and so on.
Banks ranked by openness

New market players

Now, let’s continue with starters. It’s cool that almost every bank can apply for being listed in the Open Banking Monitor. The latest release dated by September 2018 features such names as DnB, Kuveyt Turk, Liberbank, Nationwide, and Piraeus. They differ in approaches to open banking documentation and overall success.

For instance, Piraeus needs a bit more experience to enter the highest rank while DnB has to work on scope. Simultaneously, Kuveyt Turk shows the best progress – the bank entered the top tier right away. Particularly, it’s because of a promising development based on API for incident operations and management.

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Potential risks and pitfalls

The last section before conclusions will be less positive, sorry for this. The idea of open banking looks highly promising as it can deliver valuable benefits for traditional banks, startups, customers, and the entire financial ecosystem. However, there are threats and risks, too.

The most challenging things for the next several years are as follows:

  • Great competition. First and foremost, the more banks will introduce dev API-based platforms the more difficult it will be to attract developers. Every bank should do its best. And it may be pretty costly and difficult.
  • Limited scope. In the beginning, data shared via APIs will be limited to current account information. Further, the banks will add cards, payments, and other transactions. This also requires significant investments.
  • Problems with integration. All innovative approaches are odd, clunky, and slow. Over time, they are developed and upgraded to become new industry standards. Banks should be ready to suffer from performance dips at the start.
  • Too quick pace. The leaders have a lot of powerful solutions already. They are way ahead of starters. That’s why it’s better to develop iteratively, create MVP for customers, test, and upgrade legacy apps.

To assess and mitigate risks, you may be interested in advanced business intelligence solutions from our team.

The future of open banking

With new regulations, the open banking strategy becomes almost necessary for enterprises that want to remain competitive. As startups reshape the industry, banks can either join or confront them. The first option is more beneficial for both parties. Moreover, customers can get higher satisfaction from cooperative open banking systems because of better access to data and improved personalization.

In this case, one of the main challenges falls into the tech category. How to create an efficient open API? Which features to implement? How to provide the best experience for employees, external developers, and end-users? Often, in-house IT departments are too costly and/or too difficult to manage. DICEUS can help here. We handle all development stages, from initial analysis to support, especially for banking companies.

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