Open banking APIs are becoming increasingly important as regulations such as PSD2 reshape how financial institutions manage and share customer data. Rather than operating exclusively through closed banking systems, financial institutions must prepare to securely provide authorized third parties with access to data and services that have traditionally remained within the bank.
The transition involves more than meeting a new regulatory requirement. Banks must consider how their technology, organizational structure, data management practices, and customer relationships will need to evolve as open banking creates a broader ecosystem of financial institutions, fintech companies, and third-party applications.
The banking industry is undergoing a major transformation in the wake of new regulations, such as the PSD2 directive in the European Union. As a result, banks are increasingly turning to APIs (Application Programming Interfaces) to provide open banking services. This allows third-party developers to create apps and services that can be used in conjunction with a bank’s existing products and services. In many ways, this represents a major shift in the way that banks do business.
We can expect a return to fundamentals by many of the forward-thinking financial institutions affected by the implementation of PSD2 and Open Banking regulatory changes. Those that are re-examining what it means to be a FI in partnership with their customers will be more likely to have taken the steps to beyond opening data access to authorized fintech.
Though banks will have to reconsider much of the way they are currently organised to run their business, operationally (breaking down siloed lines of business), culturally (creating an organisational structure more suited to agile and rapid API development) and more broadly considering its wider strategic perspective, fundamentally, the success of the banking API ecosystem that a bank may wish to build is dependent on the data it can define, aggregate and then safely expose via APIs.
Mercator Advisory Group recognizes that while there will be the forerunner consumers eager to take advantage of the newfound freedom going live in January 2018. We are quick to add that there will also be a large swathe of consumers that will want to make a more gradual movement to self-determination of data custody and sharing. Providing a sense of stability and continuity to these customers plays to FIs’ established brand and will further cultivate the sense of support in navigating this newly opened territory and the responsibility it carries.
The development of an open banking ecosystem requires financial institutions to reconsider how data moves throughout their organizations. Before banks can effectively expose information through APIs, they must be able to identify, organize, aggregate, and secure that data across business lines that may historically have operated independently.
Organizational changes may be equally important. Developing and maintaining APIs requires coordination among technology, compliance, product, and business teams. Banks accustomed to siloed operations may need more agile structures that allow them to develop services and respond to changing market requirements more quickly.
Customer relationships will also remain central to the transition. While some consumers may readily embrace the ability to share financial information with third-party providers, others may be more cautious about allowing outside companies to access their banking data. Established financial institutions can play an important role in helping these customers understand their options and navigate new responsibilities involving data access and consent.
PSD2 may require banks to open portions of their infrastructure, but compliance alone will not determine which institutions benefit most from the change. Banks that treat open banking APIs as both a regulatory requirement and an opportunity to strengthen their technology, partnerships, and customer relationships may be better positioned as the financial services ecosystem becomes increasingly open and interconnected.
Overview by Joseph Walent, Associate Director, Customer Interactions Advisory Service at Mercator Advisory Group
