In September, a year passed since the principles of open banking were fully implemented in the EU member states pursuant to the revised Payment Services Directive (PSD2). The directive requires financial institutions to provide third-party providers (TPPs) with access to the information about the accounts of their customers (Account Information Service – AIS). This access is supposed to be provided via IT systems, and only with the consent of the customer. The financial institutions are also supposed to enable the third-party providers to execute payments on the customer’s behalf (Payment Initiation Services – PIS). At the time when the directive was announced, most banks expressed concerns about the possible fragmentation of the offer and the loss of customers to technological companies. However, a significant portion of the banks prepared for the changes by planning the necessary investments.
Interest in open banking
A study carried out in 2019 by Next Digital Finance indicated that 67 per cent of European banks intended to invest in open banking solutions, and 80 per cent wanted to establish cooperation with fin-tech companies. 62 per cent of the banks declared their intention to develop business ecosystems associated with open banking. The banks mainly planned to enable the aggregation of clients’ accounts in various banks, to use APIs (that is, interfaces enabling communication between IT systems) provided by the fin-techs, as well as to offer their own APIs.
According to data provided by the Tink platform, this year the percentage of bank managers with a positive attitude towards open banking has increased from 55 to 61 per cent, and 62.8 per cent of European banks have increased their budgets associated with the implementation of open banking principles. At the same time, 69 per cent of banks intensified their cooperation with fin-tech companies. Banks in the United Kingdom, Belgium, France, Portugal, and Germany were the most advanced in this regard. The median amount of spending allocated to open banking solutions was EUR 50-100 million, but 45 per cent of the surveyed decision-makers indicated a higher amount.
However, European customers are still highly distrustful towards open banking solutions. According to a study conducted by ING International in 13 countries, on average only 30 per cent of customers are willing to consent to third-party access to their data. In some countries, this share is significantly lower. The data obtained by ING indicate that only 4 per cent of customers in the Netherlands would agree to share their data with non-bank institutions. In turn, the Ipsos survey conducted in the United Kingdom shows that British customers are ambivalent about the discussed changes. On the one hand, 75 per cent of respondents would like to make use of the analyses of their expenses, but on the other hand, only 40 per cent would agree to share their data.
According to a study carried out by Epam in the United Kingdom, United States, Hong Kong, and Singapore, only 3 per cent of the customers use the digital services of neobanks (that is, online banks), treating them as their sole provider of banking services, while 14 per cent use both the traditional and non-traditional banks at the same time. Another barrier outside of low levels of customer trust is the defensive approach of most banks, which are treating open banking primarily as a regulatory necessity rather than a market opportunity. Most banks providing APIs to third parties have basically limited their input to the fulfilment of the basic requirements contained in the PSD2. Despite this fact, more and more banks are now increasing the number of available interfaces and expanding their functionalities (through the so-called developer portal), thereby allowing the third-party providers to develop and test new products. This enables them to better understand customer behavior (for example, thanks to e-commerce or insurance transactions) and to learn a different approach, which leads to the monetization of the benefits resulting from open banking. Such a policy is pursued, among others, by the Spanish bank BBVA, the Austrian bank Erste, or the Singaporean bank DBS.
In the United Kingdom, 75 per cent of respondents would like to make use of the analyses of their expenses, but only 40 per cent would agree to share their data.
The importance of API standardization and the implementation of guidelines
For the time being, the main obstacle to the implementation of open banking solutions is the lack of standardization of the APIs, which should be stable and secure. The multiplicity of API types also increases the costs of third parties, making it difficult for them to scale up the offer of new products on the European market. In the European Union, works on the development of API standards are currently conducted within the framework of the Open Banking Europe initiative. In addition, a supra-European project known as the Financial Action Task Force is being implemented with the participation of financial centers from 37 member jurisdictions and 2 regional organizations. Its main objective is the implementation of guidelines for the digital identification of customers.
The main product, which is being developed thanks to the APIs, is the aggregation of client accounts in different banks and other institutions. This provides the ability to develop offers in the area of Personal Finance Management (PFM). The customer has access to all of their financial data in one place, they receive information about the structure of their expenditures and financial flows, as well as recommendations on saving money and achieving financial objectives. Appropriate applications can generate market information related to the client’s situation, offer solutions in the field of asset management, budgeting, saving, and investing. Such apps are offered to banks by fin-tech companies such as Mint, Personal Capital, Prism, Acorns, Robinhood, and Stash. For now, however, few bank customers use them, even though they are frequently offered under the brand name of the bank, that is, in the so-called white label formula.
In the European Union, works on the development of API standards are currently conducted within the framework of the Open Banking Europe initiative.
“Personal Finance Management solutions could be the future of finance, but we are still 5 or 10 years away from that,” says Cezary Stypułkowski, the CEO of mBank. For the time being, such solutions are in their infancy, also in Poland. The account aggregation services are only offered by several banks (such as ING, PKO BP, Millennium) and with certain limitations, because the number of banks in which the accounts are subject to aggregation is still low. Moreover, the initiation of payment transactions in one bank from the interface of another bank (that is, the so-called Payment Initiation Services) is still almost non-existent, even though it was supposed to be an important element in the implementation of the PSD2. This functionality is used, via external operators, by the customers of certain e-commerce stores and utility providers.
Varied experiences and programs
Open banking is also developing outside of the European Union member states. Even before the full implementation of the PSD2, its principles had already been introduced in Singapore and Hong Kong. The coronavirus pandemic has also led to increased interest in services based on open banking in the United Kingdom. According to the Open Banking Implementation Entity (OBIE), which is an organization set up by the Competition and Markets Authority (CMA) in order to support the development of open banking in the United Kingdom, in the period from January to September the number of users of open banking-enabled solutions doubled and now reaches two million.
This is primarily thanks to the young customers (45 per cent), who started using personal finance management apps. The applications not only aggregate accounts in different banks, but they also make it easier for customers to access credit (for example, because the potential lender takes into account all of a given customer’s accounts), manage their overall debt, and apply for a mortgage without the need to supply paper documents. During the lockdown, there was an eightfold increase in the initiation of payments in traditional banks from the level of digital entities such as Monzo or Revolut. In order to facilitate the use of open banking solutions, OBIE established a digital platform known as the Open Banking App Store, which provides more than 80 applications and online products tailored to the varied needs of retail and business customers.
Since July 2020, the first phase of implementation of open banking principles has been functioning in Australia, which has the most ambitious program in this regard. In November, open banking principles will cover not only the data concerning accounts and payments, but also data relating to housing loans, investment loans and consumer loans, accounts associated with debit and credit cards, as well as direct debits. The sharing of data with external operators will be based on the customers’ voluntary consent. Australia ultimately aims to build an open data economy, where data sharing will also apply to other sectors of the economy, such as the providers of public utilities (energy, water, gas, telecommunications operators, etc.). This is supposed to generate increased competition between the companies and incentivize them to better meet the needs of the customers, who will act as the administrators of their own data.
OBIE established a digital platform known as the Open Banking App Store, which provides more than 80 applications and online products tailored to the varied needs of retail and business customers.
The situation is somewhat different in the United States, because in that country there is no legislation explicitly regulating the area of open banking. However, under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which amended the system of financial supervision and consumer protection, United States citizens have the right to share their financial information with external operators. Because of that, the Consumer Financial Protection Bureau (CFPB) has developed appropriate standards such as data types, consent forms, specified liability of the parties, etc. As a result, in the United States, external financial operators were able to register many more APIs than in Europe. At the end of the first quarter of 2020, the number of API registrations in Europe was just over 300, while in the United States the Plaid platform offered 2500 APIs belonging to various entities. Another interesting development in this sphere is the initiation of a project known as FDX API 3.0, whose aim is to establish standards for interfaces between financial institutions, data-aggregating entities, fin-techs, and other companies interested in using APIs. The project has been joined by 48 organizations since April 2020, and the total number of participating entities now reaches 150. Additionally, a group of more than 20 large financial institutions and 7 out of the 10 largest American banks have also created an open banking portal which facilitates access to banking services via reliable, digital client authentication. According to Brandon Hewitt, the founder and technology director at the company MX, which is a provider of digital solutions, American banks have already realized that thanks to the trust of their customers they can benefit much more from open banking than their competitors operating outside of the banking sector.
Data custodian status
More and more banks across the world are starting to realize that open banking will affect their competitive capabilities and their role in the financial ecosystems. More than half (57.6 per cent) of the 290 banks surveyed by the open banking platform Tink claim that they have adequate open banking development strategies. The basic strategy employed by banks is the development of digital platforms (Banking as a Platform) on which the bank’s own offer would be available alongside the offers of third-party providers. In this case, the advantage of the traditional bank would lie in its ability to provide APIs to the third-party providers and to take over the comprehensive contact (the interface) with the customers. The banks would then be able to offer multi-product solutions, which wouldn’t be limited to purely financial services, but would also include various complementary solutions – all provided in a single place.
Open Banking is a path towards the development of banking platforms.
According to the consulting firm Accenture, banks implementing such a strategy would generate revenues in two ways. Directly from the third-party providers, by offering them a platform used as a channel to distribute their products in exchange for a commission or a share of their revenues, and also in an indirect way – by using their partnerships with the third-party providers in order to extend their customer base and to increase their productivity. One of the pioneers in this field is the Spanish bank BBVA.
The second popular strategy is based on the “banking as a service” approach (BaaS). In this case, value would be generated by providing access to the banking infrastructure (also through the APIs) to third parties, which do not have a license from the regulator. This would enable third-party providers to offer financial products to their customers. In this way, other entities would serve as channels for the sale of banking products under their own private labels. This strategy has already been implemented by some fully digital banking institutions such as the British bank Starling.
Paradoxically, it seems that the further progress of open banking is now to a greater extent depended on the banks that can evolve from the traditional role of custodians of capital into the status of custodians of data. In this role, they would be able to authenticate both the customers and the third-party providers. This would build the confidence of the customers in the external providers. Such a situation is already observed in the markets of the Nordic countries.
Open Banking is a path towards the development of banking platforms. Meanwhile, both the coronavirus pandemic and the digital transformation which it accelerated, as well as the environment of ultra-low interest rates, are generating even greater pressure on the introduction of such new business models. John Garvey, the leader of the Global Financial Services division at PwC, believes that banks will have to determine whether they are strong enough to create their own platforms, or whether they should become a part of the platforms created by others. The lack of a clearly defined strategy puts them at the risk of getting stuck somewhere on the periphery of the financial market. Timing is also crucial, and the pioneers will be better prepared for the next phase of development – open finance, in which data-sharing will apply to nearly all financial products.