If implemented effectively, open banking will unlock innovation that will transform and improve the customer banking experience.
Banking And Finance, Open Standards And Open Apis
- Overview of open banking
- Third party providers
- Potential Impact
- Barclays Case Study
- Innovation through engaging with developer community
- How India’s largest bank leveraged developer ecosystem
Overview of open banking
Open banking is the result of PSD2, a conscious effort to promote competition in the retail banking sector to improve customer satisfaction.
PSD2 (Revised Payment Service Directive) is an European Union directive that came into force in January 2016. It could probably be most important regulation that is transforming banking history. The aim of the regulation is to accelerate innovation, promote competition, and improve customer experience through innovative products and services.
The mandate requires banks to grant access to customers’ transaction data to third parties through open banking APIs. In other words, the account holders now have the power to grant permission to a third-party service provider, such as Mint, Stripe etc, to execute instructions on behalf of the account holder.
Europe followed by the UK governed by Open Banking Standard are the pioneers in open banking. The UK Open Banking Standard has released the highlights and milestone of PSD2 as of September 2018 and it is impressive.
The US governed by Dodd-Frank has adapted their own versions of PSD2. Similarly, the open banking system is being adopted around the world.
The open banking revolution has given rise to thousands of Third Party Providers (TPPs) that pose direct competition to the banks. For centuries banks have owned their customers’ data but did not capitalize on it. With PSD2 in the picture, it gives a TPPs the opportunity to capitalize on customer data. According to Fintech Global “the year 2018 has been a record year for fintech companies having raised $41 billion in the first half the year surpassing previous year’s record total”. With mobile internet penetration on the rise throughout the world, there is no way around open banking. The infographic highlights the top 250 fintech companies from around the world.
The entire ecosystem of TPPs revolves around APIs. APIs that were once confined to companies operating in technical domains is now the most important component of open banking. APIs can primarily classified into three types i.e. Internal, Partner & Public APIs. The infographic below gives an idea of the three types of API, their models and attributes.
Two major types of Third Party Providers (TPPs)
The third-party applications can be broadly divided into two types. Account Information Service Providers (AISPs) and Payment Initiation Services Providers (PISPs).
Account Information Service Provider (AISPs)
AISPs work by retrieving the transaction data from the bank and give the customers more control over their finance. If a person has multiple accounts, the transactional data from all the accounts can be viewed in one place such as Mint.
On the surface, an AISP seems like just an intelligent passbook, however, it offers a huge potential for creating new revenue models. An AISP application can analyze the expenditures from your transaction data on various aspects and suggest you a cheaper or better alternative.
For example: The application could notify you,
You are paying a monthly premium of $201 on your health insurance from company A. You can save $20 per month by switching to company B.
AISPs could also become a well-tailored and highly personalized marketplace which could be beneficial to consumers and businesses alike.
Payment Initiation Service Providers (PISPs)
According to a recent survey by Accenture, 1 in 3 debit card transactions and 1 in 10 credit card transactions are expected to move to PISP by 2020.
Without PISP, the payment from a customer to merchant is initiated by the merchant using the customer’s credit card or debit card. Then, the payment is debited from the customer’s bank account.
With PISP, the account holder i.e the customer grants permission to the PISP to initiate payment transfer to the merchant as well as notify the merchant. The key difference here is that the customer’s login credentials are not stored in the merchant’s system. This enables faster, convenient, and cheaper way of transaction.
The potential impact of the open banking revolution could pose a massive threat to incumbents and at the same time present a huge opportunity for first-movers.
Incumbents could lose revenue from existing revenue streams and risk losing customer ownership and can be reduced to mere account service providers. A recent study by Mckinsey estimates banks could lose up to 60% of their retail profits to third-party PISPs and AISPs over the next decade. The following image illustrates the positive and negative implications of PSD2.
Mckinsey predicts the best case scenario for banks would be that solidify their position as trusted advisor, gaining market share and generating revenue from new products and services. The worst case scenario would be that banks are reduced to mere balance sheet providers.
This has been true in case of China where Alipay and WeChat manage almost 50% ($2.9 Trillion) of the consumer’s spending on retail are routed these apps. A recent report by Bloomberg perfectly depicts payment systems in China vs US. Third party providers could put the banks out of loop by eliminating the high payment processing fees.
Similarly in India, specifically the transition is moving at a rapid pace. The market leader Paytm currently has 300 million users with an average daily transaction of $5 million. In the series regulatory reforms accelerating open banking (referred to as Unified Payment Interface in India), the RBI has permitted the transfer of money between mobile wallets and has released the guidelines on interoperability between wallets. Customers now can transfer money from GooglePay to PhonePe or any other mobile wallet and soon they can expect attractive incentives for transferring money from one wallet to the others.
How Barclays embraces open banking
Similarly Barclays is one of the recent UK banks to embrace open banking. Barclays has launched a series of 9 APIs for consumers as well as businesses. Here are some of the APIs,
Recently, Camelot Lottery, UK partnered with Barclays to send payment to its customers in real-time. Using Barclays’ API which in turn leveraging the data of PayM, Camelot can now send money to its customers using instantly just using the phone number without entering the account details. The phone number is then converted into the corresponding sort code and account number (Using PayM) and the money is credited into the customers account. According Barclays,
Camelot sends Barclays a batch file every 15 minutes throughout the day and, to date, has processed over 350,000 payments through the service.
Innovation through engaging with developer community
When it comes to public and partner API, the role of developers become crucial. In the past year, the number of banking APIs has increased and banks have started launching their own API developer portals to connect with the external developer community. Royal Bank of Canada is the latest and the first bank in Canada to launch its own API developer portal. RBC aims to accelerate innovation by crowdsourcing cutting-edge solutions.
By providing external developers, industry innovators and clients with access to select RBC APIs, we have the opportunity to increase connectivity, create new tools and experiences for clients, and enable open and innovative collaboration to improve the future of banking.
Sumit Oberai, Senior Vice-President, Digital Technology, RBC
How India’s largest bank leveraged external developer community
State Bank of India (SBI) is an Indian multinational, public sector banking and financial services company. It is a government-owned corporation headquartered in Mumbai, Maharashtra. The company is ranked 217 on the Fortune Global 500 list of the world’s biggest corporations as of 2017. It is the largest bank in India with a 23% market share in assets, besides a share of one-fourth of the total loan and deposits market.
SBI conducted an API-based hackathon by opening up its APIs and 12 partner APIs, which is unprecedented. Participants were invited to submit their ideas and create applications using SBI & partner APIs.
We have had a very successful collaboration with HackerEarth. Last year, we launched two hackathons – Code for Bank and Digitize for Bank. We got more than 7000 participants for both of these and these hackathons have helped us drive innovation. We are one of the first banks in the world to service virtualize our APIs and to offer APIs on the fly.
Sudin Baraokar, Advisor, Digital Transformation, SBI
SBI ended up with 480 ideas and 36 applicants built in a span of 48 hours. The SBI team from the Global Information centre reported that,
At Least 10% of the 480 ideas exceeded our expectations.
Banks have the option to go-at-it-alone such as HSBC or on the other hand they can partner with other fintechs etc such as Santander that partnered with Ripples for cross-border payments. Data privacy, data-sharing with TPPs, regulatory reforms such as GDPR and revenue models are some of the models are some of the areas where banks need to pay attention to. Embracing open banking seem to be the only option and the organisations who quickly adapt it stand better chance of gaining competitive advantage, market share and create new revenue streams.