July 20, 2017 | Written by: Carlo Marcoli
Categorized: Banking | Cloud | FinTech
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See how open banking APIs are transforming financial services (and businesses, too!)
What is “open banking”? I wasn’t particularly inspired by the Wikipedia definition, so I’ll give you mine. Open banking is a term that is associated with a broad set of initiatives that align to one of these three principles:
- Banking customers are empowered as the owners of their financial data.
Customer data has been traditionally locked in banks’ IT systems, but this practice is changing. Regulations, such as Payment Services Directive (PSD2), are forcing banks to “open up”, enabling customers to easily share data with third parties.
- Banking products are transparent and easy to compare.
You can understand and compare products only if they are described in a consistent way and the information is easy to access. The first phase of the UK Open Banking initiative is an example of initiatives that are targeting this space.
- Multiple parties work together to create new value chains to produce better products and services.
A traditional retail bank has its own distribution channels (such as branches, contact centers, and digital channels). It also creates its own products and has its own back-office operations. The emergence of financial technology (fintech) and the push of regulators for more competition are disaggregating and open this closed value chain. In a world of open banking, participants can specialize in one or more sub-steps of the end-to-end process. They can focus on areas that have a clear competitive advantage and leverage the scale and efficiency that partnerships with other players enable.
In this post, I describe why Open Banking APIs are important, how they are being used, and what they can mean to your business.
Why APIs are important for open banking
Web APIs are a key enabler for the types of initiatives that I just described. They are the mechanism that banks use to exchange customer data with other parties in a simple and secure way. They make it easy to access and compare banking products. They enable participants in an open value chain to interact with each other. In doing so, they keep integration costs low and allow the creation of new products and services through the aggregation of capabilities of multiple organizations.
Examples of open banking in practice
Open banking is often mentioned in relationship to compliance with regulatory standards, but in reality, the regulators are only catching up with what is happening in the market. Let’s look at examples of what some of our banking clients have done in this space.
The mobile payments hub
A European bank initially adopted the IBM API gateway to secure and simplify access from to the legacy capabilities that are hosted on the mainframe. This change improved the bank’s agility in the development of digital solutions. It was particularly helpful for one solution aimed at making money transfers as easy as sending an SMS. This solution became an overnight success and turned into a form of payment that is now accepted by the most merchants in the bank’s region.
The bank also exposed APIs directly to the merchants so that they could submit payments at a fraction of the cost that they had with traditional card-based payment schemes. Other banks in the region tried to build alternative solutions. However, because of market penetration and ease of integration, these other banks, which are also potential competitors, decided to converge on the same mobile payments platform. To further exploit this opportunity, the bank changed its organization and business model. The unit that controls the mobile payments separated into an independent business. This business can now serve a large network of distributors and has captured an even bigger market, particularly by expanding in other countries.
The digital markets maker
A large banking group positioned itself as the enabler for seamless customer journeys and corporate processes in a digital economy. Trust is an obvious requirement for this seamless integration. For this reason, the bank created a new marketplace for corporate services by acting as the source of trust. It vets and certifies service providers and then offers an identify service for its customers. This approach makes it easier to on-board and aggregate third-party services into corporate processes.
However, in the retail market, the bank is experimenting with a solution that streamlines the process of buying a house. It offers APIs that enable large real estate agents to integrate the submission and tracking of a mortgage application into their portals. Symmetrically, when a customer gives consent, it offers leads to estate agents about people who went to the bank to get a mortgage pre-approval before finding a property to buy.
The fintech hub
In this example, a global financial service organization embraced the growing role of fintech. Instead of competing against it or creating barriers to prevent the development of disruptive solutions, it positioned itself as “the partner of choice” for fintech. It used our cloud platform to create a “developer hub” that is offered to fintech as a platform for innovation. This platform includes a public sandbox environment and a live environment that users can access if they become partners with the organization.
In addition, this service organization regularly runs hackathons to foster creativity and seek new partnerships. Two of its most recent start-ups that it has invested in provide mobile solutions for mortgages and loans. One of these start-up companies offers a personal loan approval decision in 2 minutes. First, it captures information about a customer and then uses a robo-advisor to match the customer’s financial profile with the right product. Then, it submits the request and receives an instant decision in return.
The other start-up company built a one-day mobile mortgage platform. By using their mobile phone, customers can capture information about a property, verify their identity, and sign documents. This start-up company also integrated with an e-government portal to pull together all the required documentation so that a mortgage is approved in just one day.
The data aggregator
This start-up company grew to become one of the leading personal financial management platforms in Asia. It provides a holistic picture of the financial situation of a customer by aggregating data from more than 2,000 different sources. It gives a base level of service for free and charges for premium features and business accounts. Customers can also decide whether they want to make their complete financial profile accessible through APIs to third-party companies. By doing so, they can log in to an accounting platform and complete their tax return in a few minutes. Alternatively, they can have precise, fact-based, financial advice, or they can be offered products that are tailored to their specific needs.
Open banking for all
Open banking is here, and it is far from being a compliance exercise. What are you going to do with it? The status quo is changing, opening greater opportunities to create better product and services.
Open banking doesn’t apply only to banking. Regardless of the business you are in, the way in which your customers pay, or obtain credit to receive your services, is part of their experience with your products. Open banking opens them and your company to the possibility to new types of interactions.
If you take an even wider perspective, the “open banking movement” is tackling head on some of the challenges that lie at the core of creating a new open market. How can participants find other market players? How do you trust parties that you don’t know? How can you exchange sensitive data in a way that is both secure and transparent?
Sometimes it can be difficult to determine what is feasible and where it makes sense to start.
To help you move forward with your API journey, IBM can organize an API innovation workshop. In this workshop, you work with IBM consultants in exploring potential use cases for API adoption from business and technical perspectives. You also define a high-level solution and create an adoption roadmap. To learn more, contact me directly by email at email@example.com.