Open banking and five rapidly emerging business propositions

SHUTTERSTOCK/WRIGHT STUDIO

In the 2018 edition of the Innovation in Retail Banking report, Infosys Finacle and Efma reviewed a decade in banking innovation.

Regulations, when banking was in the throes of the recessionary crisis, focused on safeguarding the taxpayer and the economy by mandating banks to hold more capital against their risks. Even before the crisis, regulations in banking always focused on mitigating risk.

From then to now, in just about 10 years, mandates seem to have evidently shifted from capital regulation to innovation. In sharp contrast to expensive closed door innovation and limited discretionary spend due to high regulatory costs, open innovation is now fast becoming the norm.

Regulations in several countries have brought in open banking reforms with the objective of providing customers more control over their finances, amongst others. In January 2018, the Competition and Markets Authority (CMA) in the UK rolled out the open banking regulation mandating the country’s nine biggest banks to implement open banking standards to improve industry competition and foster customer-centric innovation.

In addition to the scope of the Payment Service Directive 2, the broader legislation in EU, the mandate requires banks to adopt and maintain common API standards, read/write API specifications, and more third-party access to current account data.

Regulatory action has moved eastwards rather fast with nearly concurrent developments in Singapore and Hong Kong. Association of Banks in Singapore has published the API Playbook developed in consultation with the Monetary Authority of Singapore (MAS).

In Hong Kong, the Monetary Authority has published its Open Application Programming Interface Framework to deploy open APIs. And India has by far the strongest growth story in the payments space with its Unified Payment Interface for real-time payments.

At the heart of all these regulations, enabling innovative propositions and business models are simple lines of code—the APIs. Here, we look at some of these new API-driven models  and propositions:

• Payment initiation service providers (PISPs) are authorised third party providers that can initiate transfers to or from a customer’s account. These include the new financial management applications that perform automated transfers as per the permission provided by a customer. An example is the unified payment interface (UPI) in India. Banks and payment service providers can easily integrate UPI in their iOS or Android applications to provide convenient real-time payments to their customers.
• Account aggregator Account information service providers (AISPs) allow customers to access their data across all their banking relationships on a single interface or application. Innovative AISP services include product comparison applications. By using a bank’s product data, AISPs can provide a generic comparison, and by combining customer and account-related APIs with the bank or product APIs, their algorithms can generate personalised comparison based on the customer’s context to make decisions infinitely easier for the customer.
• Product or API marketplace Some banks have adopted an API marketplace model to provide other challenger banks and digital upstarts access to their APIs. The banks earn fee income in an outcome-based revenue model on the use of their APIs for customer-centric innovations. RBL bank in India has a developer portal with more than 500 APIs. Fintechs and third-party developer ecosystems such as MoneyTap are using the bank’s APIs to offer loans to customers in under four minutes.
• Several leading and progressive banks have published open APIs on their developer portals. Categories range from payment functionalities, payment account data, non-payment account data, customer-related information to generic bank data such as branch or ATM locator. Spanish bank BBVA, at the end of 2017 had about 50 open APIs to its name across eight categories. The bank’s APIs support over 25 different functionalities today. In APAC, DBS Singapore has published APIs supporting 36 different functionalities. UK’s Open Banking project has exposed more than 200 APIs so far.
• Cross-selling and ecosystem integration By using APIs to exchange information among diverse ecosystem players such as insurance providers and non-banking players, banks can offer products beyond their own portfolio of deposit and lending products. New ecosystem-driven models allow banks and service providers to offer value they can’t provide on their own. What’s more, with analytics-powered insights across an ecosystem, these recommendations and offers can be made remarkably contextual.
• Data as a Service Access forms one of the most crucial aspects of a bank’s API strategy. Defining the right access to the right user groups including third-party ecosystems is central to the success of an API strategy. But now with the rise of open APIs, there is another strategic element for consideration banks can't afford to overlook.

The above models make it sufficiently clear that banks need to take a more business-centric look at their APIs. But there’s more to it. Banks need to look at their systems, processes, and applications as business enablers to ensure they are conducive to the open world of banking.

Compliance and regulatory mandates apply not only to transactions with one bank but to all the banking relationships of a customer. Banks need a core banking system built for these open banking realities.

They need a system and application architecture that allows the free movement of data efficiently. Open APIs present a unique and extraordinary opportunity for banks and financial service providers to monetise functionalities and innovate business models that were not possible until a couple of years ago.

While the challenges of interoperability due to the absence of a global standard for APIs may persist for some time to come, banks must align and transform their systems and technology architecture to be able to capitalise on new opportunities and innovate fresh possibilities.