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Why Open Banking Needs Open Source

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Why Open Banking Needs Open Source

By Ben Slater, Chief Product Officer at Instaclustr. 

Open Banking has been in effect for nearly two years, yet adoption has been relatively slow with the UK only recently passing the million customer mark earlier this year. One of the reasons for this has been the fact that nearly a quarter of established European banks aren’t planning to invest in Open Banking initiatives, compared to the near-universal adoption from FinTech’s (94 percent). As the advantages become more apparent, growth will likely accelerate, yet these figures show that there are still significant obstacles holding back adoption.

Part of the problem is that Open Banking isn’t just a regulatory issue, it’s a technical one as well. For Open Banking to work, hundreds of different systems need to be able to talk to one another and exchange data. Making this work is a huge IT challenge, especially for more established banks which are still relying on proprietary systems which weren’t designed to meet the demands of Open Banking and they, therefore, need to move to an open source model as swiftly as possible.

Moving past legacy systems

Ben Slater

Ben Slater

A key part of managing this shift is changing how Open Banking is viewed. Rather than seeing it as a regulatory burden, it should be understood as a catalyst that can help free banks from the many significant constraints caused by legacy IT infrastructure. For example, with the advent of digital banking, there is no longer the Saturday night window for patching and updates. Similarly, as transaction volume continues to skyrocket, the transaction-based pricing model of proprietary systems can quickly become prohibitively expensive. Finally, to stay competitive with digitally-native challenger banks like Monzo and Starling, banks need to deploy advanced analytics and AI-driven innovation.

All these problems are best addressed by shifting to open source which can provide a scalable, ‘always on’ solution and is the locus for the most interesting technological advancements happening today.

However, rather than switching entirely, most banks are trying to minimise disruption by adopting a blended architecture model and running open source data caches alongside their core banking systems, allowing these caches to support their customer apps and Open Banking APIs. This not only helps banks meet their regulatory obligations under PSD2, but it also unlocks a whole suite of previously unavailable consumer insight applications and fraud detection analytics. In addition, having an Open Source caching layer means that banks don’t need to expose some of the core systems to the rest of the world, making it a more secure option.

Skills to pay the bills

However, while such open source options come with a host of benefits, there are several challenges involved in making the transition. For example, because open source software is often powered by a highly active community, it can be a struggle for banks to know when and how various code releases and associated patches need to be implemented. And, given that open source communities can drive a lot of irregularly scheduled code changes, it can be difficult for businesses to make these updates fit into their own change cycles.

Therefore, to take advantage of open source, banks need to ensure they have the right mix of technical skills available at all times. Unfortunately, the competition for such expertise is fierce, with banks having to compete not only with other financial firms but also retailers, telcos, and leading internet companies like Google, Apple, and Netflix. This skills shortage can end up making banks hesitant to fully embrace open source – despite its many advantages.

Bringing in the experts

However, hesitant as some executives may be, adopting open source isn’t going to be optional for much longer. Banks that hold out will fall further and further behind in the customer experience race, overtaken by more agile players. Already, every third millennial and every fifth consumer in the UK currently holds their primary account with a challenger bank. Banks must adopt an aggressive in-house recruitment strategy, supplemented by external expertise to fill in the gaps. This ensures that the open source platforms underpinning customer banking apps or Open Banking APIs can be seamlessly maintained and updated while providing more time to transition core system functions to the cloud.

In the era of digital transformation, adopting open source platforms is essential. It enables banks to retain the security, availability and reliability they need while making them agile enough to compete on the global stage. Moreover, it can be a crucial weapon in managing the regulatory and technical challenges of Open Banking.

Banking

ECB stays put but warns about surge in infections

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ECB stays put but warns about surge in infections 1

By Balazs Koranyi and Francesco Canepa

FRANKFURT (Reuters) – The European Central Bank warned on Thursday that a new surge in COVID-19 infections poses risks to the euro zone’s recovery and reaffirmed its pledge to keep borrowing costs low to help the economy through the pandemic.

Having extended stimulus well into next year with a massive support package in December, ECB policymakers kept policy unchanged on Thursday, keen to let governments take over the task of keeping the euro zone economy afloat until normal business activity can resume.

But they warned about a new rise in infections and the ensuing restrictions to economic activity, saying they were prepared to provide even more support to the economy if needed.

“The renewed surge in coronavirus (COVID-19) infections and the restrictive and prolonged containment measures imposed in many euro area countries are disrupting economic activity,” ECB President Christine Lagarde said in her opening statement.

Fresh lockdowns, a slow start to vaccinations across the 19 countries that use the euro, and the currency’s strength will increase headwinds for exporters, challenging the ECB’s forecasts of a robust recovery starting in the second quarter.

Lagarde saluted the start of vaccinations as “an important milestone” despite “some difficulty” and said the latest data was still in line with the ECB’s forecasts.

She conceded that the strong euro, which hit a 2-1/2 year high against the dollar earlier this month, was putting a dampener on inflation and reaffirmed that the ECB would continue to monitor the exchange rate.

The euro has dropped 1% on a trade-weighted basis since the start of the year, but is up nearly 7% over the last 12 months. Against the U.S. dollar, that number rises to over 10%.

MORE STIMULUS?

Opening the door for more stimulus if needed, Lagarde confirmed the ECB would continue buying bonds until “it judges that the coronavirus crisis phase is over”.

Lagarde also kept a closely watched reference to “downside” risks facing the euro zone economy, which has been a reliable indicator that the ECB saw policy easing as more likely than tightening.

But she signalled those risks were less acute, in part thanks to the recent Brexit deal.

“The news about the prospects for the global economy, the agreement on future EU-UK relations and the start of vaccination campaigns is encouraging,” Lagarde said. “But the ongoing pandemic and its implications for economic and financial conditions continue to be sources of downside risk.”

Lagarde conceded that the immediate future was challenging but argued that should not impact the longer term.

“Once the impact of the pandemic fades, a recovery in demand, supported by accommodative fiscal and monetary policies, will put upward pressure on inflation over the medium term,” Lagarde said.

Benign market indicators support Lagarde’s argument. Stocks are rising, interest rates are steady and government borrowing costs are trending lower, despite some political drama in Italy.

There is also around 1 trillion euros of untapped funds in the Pandemic Emergency Purchase Programme (PEPP) to back up her pledge to keep borrowing costs at record lows.

The ECB has indicated it may not even need it to use it all.

“If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full,” Lagarde said.

Recent economic history also favours the ECB. When most of the economy reopened last summer, activity rebounded more quickly than expected, indicating that firms were more resilient than had been feared.

Uncomfortably low inflation is set to remain a thorn in the ECB’s side for years to come, however, even if surging oil demand helps put upward pressure on prices in 2021.

With Thursday’s decision, the ECB’s benchmark deposit rate remained at minus 0.5% while the overall quota for bond purchases under PEPP was maintained at 1.85 trillion euros.

(Editing by Catherine Evans)

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Bank of Japan lifts next year’s growth forecast, saves ammunition as virus risks linger

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Bank of Japan lifts next year's growth forecast, saves ammunition as virus risks linger 2

By Leika Kihara and Tetsushi Kajimoto

TOKYO (Reuters) – The Bank of Japan kept monetary policy steady on Thursday and upgraded its economic forecast for next fiscal year, but warned of escalating risks to the outlook as new coronavirus emergency measures threatened to derail a fragile recovery.

BOJ Governor Haruhiko Kuroda said the board also discussed the bank’s review of its policy tools due in March, though dropped few hints on what the outcome could be.

“Our review won’t focus just on addressing the side-effects of our policy. We need to make it more effective and agile,” Kuroda told a news conference.

As widely expected, the BOJ maintained its targets under yield curve control (YCC) at -0.1% for short-term interest rates and around 0% for 10-year bond yields.

In fresh quarterly projections, the BOJ upgraded next fiscal year’s growth forecast to a 3.9% expansion from a 3.6% gain seen three months ago based on hopes the government’s huge spending package will soften the blow from the pandemic.

But it offered a bleaker view on consumption, warning that services spending will remain under “strong downward pressure” due to fresh state of emergency measures taken this month.

“Japan’s economy is picking up as a trend,” the BOJ said in the report, offering a slightly more nuanced view than last month when it said growth was “picking up.”

While Kuroda reiterated the BOJ’s readiness to ramp up stimulus further, he voiced hope robust exports and expected roll-outs of vaccines will brighten prospects for a recovery.

“I don’t think the risk of Japan sliding back into deflation is high,” he said, signalling the BOJ has offered sufficient stimulus for now to ease the blow from COVID-19.

NO EXIT EYED

Many analysts had expected the BOJ to hold fire ahead of a policy review in March, which aims to make its tools sustainable as Japan braces for a prolonged battle with COVID-19.

Sources have told Reuters the BOJ will discuss ways to scale back its massive purchases of exchange-traded funds (ETF) and loosen its grip on YCC to breathe life back into markets numbed by years of heavy-handed intervention.

Kuroda said the BOJ may look at such options at the review, but stressed a decision will depend on the findings of its scrutiny into the effects and costs of YCC.

He also made clear any steps the BOJ would take will not lead to a withdrawal of stimulus.

“It’s too early to exit from our massive monetary easing programme at this point,” Kuroda said. “Western economies have been deploying monetary easing steps for a decade, and none of them are mulling an exit now.”

(Reporting by Leika Kihara and Tetsushi Kajimoto; additional reporting by Kaori Kaneko; Editing by Simon Cameron-Moore & Shri Navaratnam)

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World Bank, IMF agree to hold April meetings online due to COVID-19 risks

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World Bank, IMF agree to hold April meetings online due to COVID-19 risks 3

WASHINGTON (Reuters) – The International Monetary Fund and the World Bank have agreed to hold their spring meetings, planned for April 5-11, online instead of in person due to continued concerns about the coronavirus pandemic, they said in joint statement.

The meetings usually bring some 10,000 government officials, journalists, business people and civil society representatives from across the world to a tightly-packed two-block area of Washington that houses their headquarters.

This will be the third of the institutions’ semiannual meetings to be held virtually due to the pandemic.

(Reporting by Andrea Shalal; Editing by Chris Rees

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