Open Banking: Lessons Learned and Looking Towards the Future

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The idea of sharing data and exposing APIs to third parties was usually routinely dismissed out of hand by financial institutions. But that’s beginning to change, as both regulatory and consumer demands are moving the world in the direction of open banking.

First, consumers are asking for more control over their data, especially considering recent scandals involving misuse of personal information.

Regulatory forces are also pushing banks and payments companies towards more sharing of data, whether they like it or not. Most notably, the European Union’s Second Payment Services Directive (PSD2) came into effect earlier this year, which allows individuals to share account data with third parties that they authorize. This means financial firms are not solely in control of their customers’ data anymore. Similarly, the EU’s new General Data Protection Rule (GDPR) also aims to give citizens control of who accesses their personal data, and for what purpose. Other geographies, such as Singapore, Hong Kong and Australia are also moving towards creating open banking standards and have recently been noted by the International Data Corporation for their “readiness”.

Learning from others
No such regulations currently exist in the U.S., but it is something U.S. regulatory bodies such as the FDIC and others have discussed. In fact, jurisdictions that are later to embracing the open banking ethos can actually benefit from learning from early adopters. As noted in American Banker, some consumer advocacy groups in the UK have called attention to the potential threat of fraud that can initially arise from the new data-sharing model. Also, some consumers initially were not completely aware of the benefits of the new statutes, and needed to be educated on them. Banks in the U.S. and elsewhere can learn how the industry in other countries dealt with these issues and adapt accordingly.

The reality is that all banks will likely eventually have to embrace open banking, regardless of whether or not they want to. That’s the way the industry is moving. However, banks that delay in this area risk falling behind those that do embrace open banking, and possibly risk irrelevance. Early adopters such as BBVA and Santander believe they have gained a significant edge by embracing aspects of open banking at such an early stage.

John Mitchell
`John Mitchell

What does the future look like?
Simply put, banks cannot innovate at the rapid pace necessary in order to stay relevant among consumers in the current day. Being saddled with legacy technology means they simply can’t be as nimble as fintechs or the increasing number of digital-only “challenger banks” that have arisen. Financial institutions need to find a way to access this new technology and incorporate quickly.

The easiest – arguably only – way to do this is by exposing APIs to third party developers. This allows for quick integration without having to touch legacy core systems that still sit at the center of many bank operations. Also, it means banks can quickly and easily integrate new products and offerings created by fintechs and other third parties, and don’t have to conceive, create and implement every new digital service themselves internally. Otherwise, banks are just trying to follow their own “digital road map” using their own resources, which is a lengthy, costly and time-consuming process.

Embracing open banking and therefore APIs ultimately means that banks around the world can innovate quickly, keep pace with customer (and in some places, regulatory) demands, and advance their customer experience in an affordable, efficient way.

About John Mitchell:
John Mitchell is the CEO of Episode Six and an expert in the payments industry, with decades of experience in leading and growing startups. Prior to co-founding Episode Six, John was the CEO of Rêv Worldwide. Prior to Rêv, John was at NetSpend Corporation where he was the primary architect and strategist of NetSpend’s sales and distribution strategy.