Why the financial services sector should be happy Open Banking was imposed upon them

By Martin Gaffney, Area Vice President – EMEA Yugabyte, the company behind YugabyteDB, the open source, high-performance distributed SQL database.

Database specialist Martin Gaffney hopes the sector now sees that Open Banking adds genuine value and helps companies better manage complexity

July 2022 marked five years since the debut of API specifications for Open Banking. At the time, most of the financial services sector were unimpressed—seeing Open Banking as a barrier rather than an opportunity.

Five years on, I think we can agree that the sceptics were wrong. In May 2022, the UK open banking community made a record 1 billion API calls. There are now 336 regulated providers of Open Banking-based services in the market, 246 third party providers, and 90 account providers. This shows what a buoyant ecosystem Open Banking has contributed to.

So, it’s clear that Open Banking wasn’t a restrictive move by the regulators, in fact, quite the opposite.

It showed that having to work with APIs is not a constraint but in fact opens up opportunity. Accepting that fact reversed 20 years of strategic thinking in the UK banking sector. Previously it had centred on disintermediation, i.e., that the value-add was owning and running your own supply chain.

An end to ‘disintermediation’?

Management consultants told us brands needed to do this, to reduce complexity. This was a warning that made sense when Tier 1s and 2s were building their own websites, and banking applications were running off their own mobile solutions.

At this time, the end goal was owning every touchpoint across the banking journey online, from the mobile end to the payment back end. However, managing the entire journey came at a cost; complexity. Bank CIOs soon learnt that to write a new web page, all the right links had to be set up for it to talk to an application server, which needed to be set up to talk to the right database (which lived, of course, in that expensive on-prem glasshouse).

As a certain now 60-year old superhero once said, ‘With great power comes great responsibility.’ If you own everything, everything is your problem, from start to finish. That meant having to pay for all sorts of developers with sometimes overlapping skill sets to maintain your big tech stack.

Open Banking changed all that. Welcome to a new era, that of ‘de-disintermediation.’ It means we all need to work in a different (and far more open) way.

Why? Because, being adept at exposing and consuming APIs are now basic table stakes in modern online financial services. You need the right skills and tools in place to support modern banking software.

Open Banking means permitting a third party to come in at the application server layer

Consumers don’t care about your problems (unless they are impacted!). All they want is a great, easy-to-use mobile banking app. Part of that CX is the ability to bring all their accounts together in one place. This kind of embedded banking is why Klarna is thriving, and it’s how many new payments brands work. This spawned the explosion of FinTech.

Services like Buy Now, Pay Later and being able to transfer money across banks with just a swipe of your thumb make sense to the digital native. Customers expect this level of services and connection , so you need to meet their needs, de-disintermediate, and adopt Open Banking.

Doing so won’t just make your customers happy. It will make your life easier, too. By supporting Open Banking, you must build apps in a way that permits third parties to come in at the application server layer.

You must also allow the other party’s application server to talk to other application servers, all of which have databases at the back end. This is surely where the API absolutely comes to the fore. In fact, the smart and relevant financial services CIO welcomes that widespread use of APIs makes it simple for two pieces of software to talk to each other.

Even better, they do so via a form of software ‘contract.’ A commitment to deliver a service that allows someone to access their bank account and returns their statements or their latest transactions.

With this modern digital banking, you must give me what I need, and this all happens in one agreed format, e.g., JSON, JavaScript Object Notation, etc.

The brands who will succeed in an Open Banking/de-disintermediated/API-centric world are those that build their processes, skill sets, tools, and architectures in a way that embraces this way of working.

They do so because Open Banking unlocks business value. APIs allow you to expose data to the web and give chosen partners access, adding value.

It may also spell the end of the huge monolithic banking applications originally set up to do digital banking. Developers now routinely break the front off and replace proprietary apps with APIs.

App modernisation and microservices

Why? Because moving to an API-based model allows you to outsource the value of your back end –even if that’s still locked in some monolithic mainframe app in your data centre.

Indeed, with APIs and with cloud, two separate tech and business development threads dovetail perfectly: app modernisation and microservices. These bring everything to do with data as close to the customer as possible, around the world.

Open Banking started as a push to allow more competition in the market but has revealed that the API is the best way to comply with regulations and solve many of your technical debt issues.

As you start on the path to de-disintermediation by breaking your big banking systems up, you’re also breaking your data up. You can’t just stick with the tried and true (but hideously expensive to run) monolithic database on the back end. Your on-prem monolithic proprietary databases never gel well with cloud and microservices.

The best move is to move to the modern data layer, an intrinsic piece of this microservices architecture. Given this, do consider the YugabyteDB distributed SQL cloud database, for example. This gives you huge operational, development and support advantages.

Given all it’s done for the sector, this Summer maybe raise a piña colada or two to Open Banking, which unlocked the door for you banking CIOs to access business value by setting up a supply chain that you no longer need to 100% own.