Navigating Open Banking - Strategies, Implications, and Key Insights 

Traditional banking is facing pressure from market stakeholders to transfer data ownership from themselves to customers. This pressure varies depending on the country or region and may originate from regulators or customers. Regardless of the driving force, the consequence remains nearly the same: the “opening” of data. This trend is creating new business opportunities for both banks and fintechs.

This article will explore the concept of Open Banking and how to leverage Open APIs to achieve business transformation in the financial sector. 

Open Banking facilitates access to customer banking and financial data from both banks and non-bank financial institutions by third-party service providers through robust Banking APIs. Naturally, customers are required to grant permission for their banks and other financial service providers to share their account-related information with Open Banking platforms.

Figure 1: Open Banking Context

Open Banking is anticipated to achieve a market size of $395 billion by 2026, encompassing approximately 39 million customers globally.

Open Banking has evolved into a global movement (refer to Figure 3), but jurisdictions are adopting their approaches, reflecting their respective markets and policy objectives. Sometimes, they are even developing cross-industry approaches beyond financial services. However, they all broadly fall into one of two categories:

• Market-driven: Several countries, including India, Japan, Singapore, and South Korea, currently lack formal or compulsory Open Banking regulations. In the United States, in light of the Consumer Financial Protection Bureau or CFPB, 1033 rule propsal, policymakers are introducing a range of measures to promote and accelerate the adoption of data-sharing frameworks in banking.
  
  
• Regulatory-driven: Europe pioneered Open Banking with the EU’s PSD2 and the UK's Open Banking Standard initiatives. Hong Kong and Australia are two significant jurisdictions that have chosen a regulatory-driven approach outside the EU.
  
  

Figure 2: Open Banking Worldwide Adoption (Source: Konsentus)

Open Banking is perceived as an enabler in at least three main areas:

• Enhancing the customer’s digital experience
• Expanding Banking as a Service by launching new digital services
• Increasing revenue opportunities
  

Open Banking innovation will also capitalize on new emerging themes on the horizon, allowing for a reduced time to market.

Open Banking: A SWOT Analysis

SWOT is an acronym for Strengths, Weaknesses, Opportunities, and Threats. A SWOT analysis is a strategic tool used by businesses to measure and evaluate their overall performance, as well as that of competitors, objectively. This helps business owners make smarter decisions for their companies.

We have summarized a SWOT analysis in the table below to shed more light on the current market standing for banks.

Table 1: Open APIs SWOT Analysis (Source: Celent)

Strengths

1. Centralized services: Open Banking provides banks with complete control over various financial services, including advice, loans, transfers, and financing, all accessible in a single dashboard. Customers who hold accounts in multiple banks can utilize a single TPP (Third-Party Provider) to access all their accounts and initiate payments without the necessity of logging in through different security protocols or screen scraping.
   

2. High security: Open Banking mandates that Open APIs exposing confidential data adhere to various security requirements set by regulations or market standards. For instance, in the case of the EU's PSD2, Banking APIs utilize OAuth 2.0 and OpenID Connect (OIDC) to establish measures that enhance the security of APIs and customer data.
   

3. Improved customer experience (CX): Practically all aspects of finance and banking can be redesigned thanks to Open Banking. Customer experience is one of the primary beneficiaries of legacy system modernization, as Open Banking allows customers to enjoy a seamless and frictionless experience with their bank, regardless of the TPP application they choose.
   
   

Table 2: Open APIs SWOT Analysis (Source: Celent)

Weaknesses

• Accessibility: The digitization that Open Banking brings into the banking experience is more likely to be adopted by Millennials than by Baby Boomers.
  

• 100% Digital - open banking requires regular internet access and may not benefit certain users who do not have access to the Internet.
  
  
• Weakens bank-customer relationship: As everything is handled digitally, face-to-face encounters between the customer and the bank are diminishing. This can lead to a breakdown in the relationship.
  
  
• Low customer credibility: While consumers show interest in open banking, they also express concerns, especially about data privacy in financial services, security, and the use of personal data. Respondents highlighted potential identity theft (69 percent) and misuse of data (60 percent) as the aspects of open banking that most concerned them.
  
  Meanwhile, financial concerns like losing money ranked relatively low (41 percent). The increase in instances of data theft and breaches has made consumers more sensitive about protecting their data.

Opportunities

• Innovations: Open Banking introduces new roles and stakeholders to the typical banking ecosystem. Banks can make the most of these roles and create new products and services.

The key players here are TPPs, entrusted with depositor account information and transmitting instructions for fund transfers, and banks, which hold customer and depositor account information and are responsible for managing this information.

Figure 3: Open Banking Roles with PSD2 (source: BIP)

• Personalized offers and discounts: With Open Banking solutions, stakeholders can obtain more insight into financial data. This is advantageous in various economic analyses, creating more opportunities for banking customers.
  
  
• Partner Ecosystems: This can lead to collaboration and the development of new services, generating revenue rather than simply maintaining conventional core banking data.

Figure 4: Open Banking Ecosystem (source: The Digital Fifth)

Threats

1. Monopolization: Banking today is predominantly characterized by one or a few major banks that shape market dynamics. Open Banking has been introduced to make banking a more competitive business. One of its main goals is to provide all financial service providers with an equal opportunity for success. However, transitioning to open banking may still result in the same monopoly these large banks maintain, posing a clear threat to the financial industry and raising concerns about regulatory compliance.
   

2. Fraudulent activity: Open Banking, even with extreme security measures, poses a potential gold mine for fraudsters, particularly through identity fraud. For this reason bodies like the Financial Data Exchange (FDX) and the CFPB are currently working with banks in developing industry standards and regulations that cover customer authentication, data protection, transaction risk analysis, and fraud prevention mechanisms.
   

3. Fintechs: The growth of companies that have replaced traditional banks is a significant drawback for Open Banking. The fintech market is expanding, with diverse services and a presence in many countries.

Figure 5: Fintech Market (source: Data Intelo)

Open Banking Strategy: Key Points

All the information above must be considered to establish business and technology strategies when deploying an Open Banking solution.

Figure 6: Key points in Open Banking Strategy

1. Formulate an Open API vision: Banks can leverage their brands and customer bases to integrate with partners and other firms to offer new innovative services. As they chart an Open Banking solution, most banks will choose between three basic models. Depending on the business use case, they can all be combined in the bank’s overall API strategy.

• Aggregator model: Banks sell on behalf of—or together with—a service provider and act as agents. An obvious use case for aggregation is providing account information from multiple bank accounts.
  
  
• Distributor model: Banks process what is ultimately sold by a third-party provider, thus acting as a pure service provider or provider of a product, similar to a point-of-sale consumer loan for home appliances. In this case, the third party (i.e., home appliance retailer) owns the customer interface.
  
  
• Orchestrator model: Banks build their platform or stand-alone application with products or services by integrating third-party providers into their platforms.

Figure 7: Open Banking Models (source: Banking Hub)

The success of any Open Banking business model will depend on the value it provides or the monetization options it creates. Participants can bundle or unbundle offerings and services to generate direct or indirect value. The quantum of value generated will depend on the overall market proposition, customer ownership model, partner value-adds, risk/liability share, and other related factors.

2. Redesign products and services: Strengthening banks’ products and services relies on optimizing processes for providing them. Internal processes should be revisited and rebuilt to establish and leverage an integrated Open API model. These efforts should be seen as an opportunity for legacy system modernization and to significantly improve the fundamental product and service supply system and service quality.

3. Build relationships between developers and TPPs: Successfully delivering Open Banking involves an outstanding customer, operations, and developer experience.

Figure 8: Open Banking Experiences (source: Eric Broda)

4. Redesign IT as an enabler: IT will enable everything discussed. Artificial Intelligence (AI), particularly machine learning (ML), is mainly used for operational enhancements such as credit granting and fraud control capabilities.

Meanwhile, API integration for banks has become a staple in introducing new products and services. Similarly, cloud and blockchain adoption are noteworthy aspects of the ongoing digital transformation as banks modernize every system across the cash cycle.

Figure 9: Open Banking Enabling Technologies (source: The American Advisory Group)

Measuring Success: Open Banking KPIs

Before entering into new business models, banks should measure and monitor the key performance indicators (KPIs) specific to Open Banking and the impact of these KPIs on the overall business performance.

Defining, tracking, and measuring KPIs across each Open Banking outcome is extremely valuable, as it helps ensure the bank can deliver on its larger business and stakeholder obligations.

Measuring KPIs is challenging as it requires establishing a foundational API governance framework around operational readiness, technology, and data that enable the bank to learn from and iterate on KPI results. 

Identifying and measuring KPIs that underpin these Open Banking outcomes supports achieving higher-level macro KPIs that drive shareholder and other business values.

Conclusions

Open Banking is a technology-enabled approach to financial services based on sharing aggregated and authenticated data, accessed by Banking APIs, to consume financial data while making transactions more secure.

Open Banking solutions should be a top priority for every bank, requiring an API First Strategy. Data can be used in more ways than ever to drive value to incumbent banks by monetizing with third parties, and extending engagement with customers through external channels. This information can also be used to provide a more valuable, customer-centric experience by extending customer data beyond the “walls” of the institution. It can introduce new revenue streams through novel and proprietary Banking APIs and legacy system modernization, among much more.

For banks that want to keep pace with market demands and outpace competitors, the move to an Open Banking strategy will be paramount to the business transformation required to match the industry’s evolving digital transformation.

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References

• Celent Reports & Insights on Open Banking. Available at https://www.celent.com/insights
• “Power plays for monetizing Open Banking APIs”
• “Open Banking”
• “The Future of Open Banking and its Impact on Banking”
• “The World of Open Banking Map”
• “Open Banking around the World”
• “SWOT Analysis: What Is It and How to Do It for Your Business”
• “A SWOT analysis for Open Banking“
• “NAB lays out data recipient ambitions under open banking”
• “Executing the open banking strategy in the United States“
• “From Open Banking to Power Finance”
• “Open Banking is here to stay“
• “​​Delivering an Outstanding Open Banking Experience“

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