Open banking represents a revolution in the way financial services are operated and delivered.
It is the banking version of a shared economy, or what Uber is to cab-hailingand Airbnb is to hospitality marketplaces.
“Either banks remove friction… or someone else will,” says Brett King, author of Bank 4.0: Banking Everywhere, Never at a Bank.
While his comment applies to Bank 4.0, the 4th instalment of digital banking to go fully virtual, it does resonate well to open banking.
What is Open Banking?
Open Banking is a system that provides a user with a network of financial institutions’ (FIs) data through the use of application programming interfaces (APIs). These FIs could be banks, but they could also be fintech firms, financial disruptors, challenger banks, virtual banks, or even companies like Uber or telecom operators like du.
Open banking allows for comparing product offerings to create a banking experience that personalizes users’ needs in the most cost-effective and secure manner.
Open banking developments are spreading across countries, and while the UK is arguably the most advanced in legislating open banking, other countries, including Australia, and surprise surprise Bahrain, are following suit.
Business Insider Intelligence (BII) says most banks (60%) and fintechs (70%) think that a revenue-sharing model, meaning that the API provider and user share generated revenue, is the most suitable option, according to a new report from Capgemini and Efma.
By tearing down the barriers to the walled garden of the banking sector and requiring banks to give rivals and third-party services access to customers’ account data – subject to their consent – Open Banking was designed to spur competition through innovation.
Challenges to adoption
But like any new innovation, it faces resistance. BII said open banking concerns may hinder global adoption.
Banks are particularly concerned about data security and customer privacy when it comes to adopting open banking.
According to BII, 76% of banks see data security and customer privacy as a concern regarding open banking adoption, while 50% of fintech respondents say the same.
Differences in organizational culture and mindset between the two are a barrier cited by 66% of banks and 70% of fintechs, and over 50% of bank and fintech respondents see problems with IT incompatibility between banks' legacy systems and fintechs' advanced IT systems.
According to Global Banking and Finance Review (GBFR), HSBC was amongst the first to offer account aggregation (the ability to view information from all of a customer’s accounts in one place), and it didn’t take long before Barclays, Lloyds and RBS/NatWest followed suit.
“Access to rival banks’ customer data, which can be used to aid product marketing and lending decisions, was always going to be an attractive prospect,” said GBFR.
While western banks are expected to take a leap of faith with this type of innovating banking, Bahrain’s adoption was a surprise. According to Zawya, Open banking is no longer open to debate in Bahrain.
“The National Bank of Bahrain (NBB) has taken a lead role in evolving the banking industry in the region, by adopting technologies that enable it to deliver new open banking services to its customers,” Zawya reported.
NBB’s new systems are provided by Tarabut Gateway, a new specialist fintech and open banking infrastructure provider. In November 2018, the Central Bank of Bahrain introduced regulation that mandated the adoption of open banking by all banks in the Kingdom by 30th June 2019.
PSD2- A game changer in 2019
BII said with the final PSD2 deadline in the EU coming up in September, we'll likely see more open banking partnerships and developments cropping up in the region.
The PSD2 (Revised Payment Service Directive) becomes implemented, banks’ monopoly on their customer’s account information and payment services is about to disappear. The new EU directive opens the door to any company interested in eating a bank’s lunch, according to Specialist Banking in the UK.
“In the near future, you may be using Facebook or Google to pay your bills, making P2P transfers and analyse your spending, while still having your money safely placed in your current bank account,” said Specialist Banking, because simply third-parties will be able to build financial services on top of banks’ data and infrastructure.
At the moment, the standard business model for retail banks is to build strong relationships with their customers by offering free current accounts and other incentives. These services are a net cost to the business, but they help the banks win trust and provide a channel for marketing more profitable products, such as mortgages, loans and wealth management services.
Open Banking threatens to sweep current business models based on banks building strong relationships with their customers.
“Agile fintech companies are already developing apps that aggregate all the financial services that a customer receives from any provider, creating a single point of control,” Specialist Banking said.
“All communication with the customer will happen via the app — and the app provider will control that communication channel, not the banks.”
Management consultancy Bain & Company points out that similar disruptions in industries — such as music and travel — have seen incumbents’ profits fall by 10–20%, often within less than five years.