Open banking is a new wave of disruption in the retail banking space. It defines the way we manage our money, shop around and buy things. Open banking has emerged strongly as a platform to give customers the right to share their secure and bank-held account information with a trusted third-party for other related financial services or products.
In the context of open banking, account information relates to a customer’s account details (ownership information), balances or transaction history. Open banking services thrive on a standardized Application Programming Interface (API) software and its seamless interaction with other software or system.
Key Features of Open Banking
– Secure Data Sharing: By consent, consumers can share their financial data with third-party providers (TPPs) such as fintech companies. The use of secure and standardized APIs protects a consumer’s financial information and prevents unauthorized access.
–Innovation and Competition: Open banking is to increase competition in the market by driving innovation in the quality of products and services that customers receive. It unlocks new opportunities for smarter, faster and more inclusive financial services.
-Increased Financial Transparency: Open Banking makes it easier for people to share their financial transactional data far more easily with a third-party online. It intends to allow a third-party provider (TPP) to initiate payments directly from a person’s account as a bank transfer (and an alternative to credit or debit card payments. Open banking enables consumers to see their complete financial picture in real-time. The consumer has financial control and the right to revoke their consent to a service at any time.
–Regulatory Compliance: Open banking regulations impact the financial products and services that leverage it by ensuring a standardized and secure approach.
Some of the services defined by open banking are:
– Buy Now, Pay Later (BNPL) Services: Companies can use open banking platform to determine a consumer’s ability to repay in real-time and in the end, create a seamless BNPL experience.
– Budgeting Apps: Open banking data can track spending in real-time, automatically categorize transactions and provide users with a clearer financial picture.
– Lending Platforms: Open banking enables faster loan approvals and expands credit access by assessing income and cash flow in real-time.
Benefits of Open Banking
Open banking aims at enhancing customer experience through personalized services, to give customers control over their financial data, foster innovation in the fintech industry. For instance, a customer’s transactional data provides a high-quality dataset that informs others about how they spend, and from this to infer their priorities, interests and needs. A consented access to a customer’s transactional data also allows companies to continuously monitor their accounts. This can be useful for assessing creditworthiness, affordability checks, automating payments or making recommendations. Open banking creates opportunities for people to put combinations of products and services together which suit them without the inconvenience of having to deal with multiple or different companies. Overall, it has the potential to transform the financial services landscape by providing more efficient and secure financial solutions.
Types of Participants
Participants in the open-banking ecosystem are banks other licensed financial institutions, fintechs and other recognised third-party providers (TPPs) that can access the data. Payment initiators and account information aggregators have indeed emerged as the two main actors.
Data Categorization
The scope of open banking varies with the kind of data and functions made available via a standardized API (application programming interface). Some frameworks apply only to specific types of data, such as payment processing data, and provide third parties with both “read” and “write” access to data and payment initiation. Other frameworks provide “read-only” rights for data aggregation purposes. With regard to data types that can be shared via a standardized API, the following five categories are worth considering:
- Product and Service Data: Non-confidential data provided by financial institutions. For example, data about their products or services offered or offices and ATM locations.
- Customer-provided data: Information provided directly by customers to their banks. Customer ownership is most obvious in this type of data.
- Transactional Data: Data generated as a result of a direct interaction with financial institutions. This data is usually available in account information or mobile banking statements. Products included can go from the most basic current account to a wide range.
- Customer Insights: Data that results from an effort made to gain insights about a customer. Credit scoring or know-your-customer data would be examples of this type of data.
- Aggregate Datasets: Non-individualized data that results when the bank uses multiple customer´s data to produce collective or average data across a group or subset of customers.
API Infrastructure
It is worth reiterating that an application programming interface (API) is a software that facilitates communication between different applications. In effect, Application Programming Interface (APIs) allow different pieces of software to talk to each other and work together. Thus, API can be used to access data stored in other software programs or systems. With regard to open banking, Application Programme Interfaces are technology that allow banks and other companies to conveniently and securely share data between their organizations. The reality about open banking is that third-party providers (companies) and consumers can easily and quickly send and receive more data.
According to Verified Market Research, the global Application Programming Interface (API) Market size was valued at $3.76 billion in 2023 and projected to reach $21.06 billion by 2030, growing at a CAGR of 17.5% during the forecast period 2024-2030. Apart from the financial sector (open Banking and financial Services) which is using APIs for fintech innovation, account aggregation, and payment processing services, Verified Market Research further identified digital transformation, Mobile App Development and E-commerce as the other drivers of API market growth. Others drivers of growth include Software as a Service (SaaS), regulatory compliance, Big Data and Analytics, Integration of AI and Machine Learning as well as the Internet of Things (IoT) Cloud computing has also increased the demand for APIs to facilitate communication and interoperability between on-premises and cloud-based systems due to the move to cloud-based services and infrastructure. In order to integrate cloud services with pre-existing applications, APIs are necessary.
- Governance
One important aspect around open banking is how to operationalize a feasible framework, including the potential creation of governance entities, their responsibilities. To ensure an adequate governance of the open-banking framework, certain aspects need to be defined, such as the appropriate mechanisms to determine engagement of participants to ensure that obligations are met, or how complaints can be resolved between participants.
- b) Interoperability
Interoperability is the ability of a system or a product to work with other systems or products without increased cost or effort. In the context of open banking, interoperability entails that legal and operational terms facilitate switching between banks. Regarding fintech companies and third party providers (TPP), interoperability provides banks with the reciprocal stability of being able to change providers or work with several of them without increasing fixed costs. When standardization has not been imposed or has not yet been completely implemented, interoperability becomes a key driver for ecosystem development, and especially for customer adoption. It is also key for enabling a competitive environment that encourages small and medium players to develop their APIs on a level playing field with banks.
- Data Security
Different potential operational and cybersecurity issues have been identified related to the use of APIs, including data breaches, misuse, falsification, denial-of-service attacks, and un-encrypted login. Measures to mitigate these risks include stricter access privileges, authorized end-to-end encryption, Multi-Factor Authentication (MFA) and vulnerability testing among others. Robust security foundations are crucial to realizing the benefits of data transfer that open banking promises without compromising the soundness of the system.
Conclusion
Open banking presents both opportunities and challenges for various stakeholders, including banks, fintech companies, consumers, and regulators. For banks, it offers potential new revenue streams and deeper customer insights, but also requires significant investment in API infrastructure. Fintech companies can leverage open banking to innovate and collaborate with banks, but must prioritize data security and compliance. Consumers stand to gain from increased access to services, improved user experience, and lower prices, although concerns around privacy and data security remain. Regulators can benefit from more surveillance that is efficient and compliance, but face challenges in developing new technical capabilities and resolving conflicts between banks and fintech companies.
BERNARD BEMPONG
Bernard is a Chartered Accountant with over 14 years of professional and industry experience in Financial Services Sector and Management Consultancy. He is the Managing Partner of J.S Morlu (Ghana) an international consulting firm providing Accounting, Tax, Auditing, IT Solutions and Business Advisory Services to both private businesses and government.
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