Open Banking is driving innovation across the globe with new partnership models and opening up new doors of opportunities. Due to recent pandemic, many financial institutions have realigned their focus toward digital transformation, and Open Banking has become central to the transformation theme. The massive increase in smartphone usage powered by readily available cheap internet has opened new business models around APIs. The emergence of a new type of ‘as-a-service’ companies, like Uber, Airbnb, and others, only part of this phenomenon. Open Banking is a similar kind of transformation driven by the use of APIs and access to customer data.
Globally, different factors are driving the growth of Open Banking across countries. In countries like the UK and European Union, this has been mainly driven by regulatory push due to UK open Banking regulations or PSD2. Consumer Data Rights (CDR) is driving open Banking in Australia. Market dynamics drive the adoption of Open Banking in countries like the US, India, and other countries. Though these countries have taken a kind of lead in Open Banking, many other countries such as Russia, Brazil, and South Asian countries have taken steps to push Open Banking within countries.
Undoubtedly, the next phase of Fintech growth and innovation in financial services would be driven around Open Banking. Banks and Financial institutions are putting up the framework to open up APIs to enable third parties, like Fintech startups which have access to innovative technologies, to use customer data, in order to drive customer convenience and satisfaction.
We will explore best practices to be followed by both Banks and Fintechs to set up the right architecture and process framework to drive business models around open Banking.
Bundling Revenues to Build a new business model
Open Banking has provided opportunities to develop new business models. Put thoughts on business models one would like to create as it opens up the business to opt for B2B2C or B2B2B or B+B2C and other combinations instead of straight business models like B2C or B2b. While it is vital to develop a new business model for both Banks and Fintechs, it is equally critical to define the revenue model between parties involved in the new business model.
Be it liabilities side of the business to develop new deposit accounts or lending to create new loan products, clearly defined revenue structure will be a significant success factor in operationalizing business model. Be it could be fee generating opportunities in customer acquisition, cross-sell /up-sell, or bundling of banking to other business structures.
Improving Customer Journey
Making the customer journey hassle-free has always been the major objective of open banking. It enables one to build banking to the customer life cycle. SAAS based accounting Fintechs are best placed for integrating banking APIs and enabling SMEs to manage banking and accounting from the same platform. Bank Open, XERO has been notable Fintechs in the accounting-based Neo Bank field.
Have an API policy in place
APIs are the cornerstone to entire Open Banking evolution. UK Open Banking or CDR has pushed Banks to develop APIs to share customer data while Account Aggregator in India also driving Banks & other FIs to set up a framework to share customer data through APIs. Furthermore, APIs will be handling customer consent.
So, it becomes crucial for both Banks and Fintechs to have the right security governance framework to manage authentication, authorization, consent management around customer data in APIs. Threats around cybersecurity and data privacy are at its high. This is more critical when you are talking about Open APIs over the internet and building an integrated platform to consume & deliver banking services. A robust consent management framework with regulatory guidelines is also essential to create an open banking platform.
Source: Photo by Shahadat Rahman on Unsplash
In addition to security, it is equally important to manage load, the performance of APIs, and the correct usage of APIs. API performance and the right set of documentation for APIs are critical for an outreach program to developers. This phase of transformation in banking will be carried out by developers, so APIs need to be mapped with the right set of standards, routines, and best practices to increase its adoption among developers.
Integrate Regulatory considerations
Regulatory guidelines bound banking services. While opening up financial services through APIs and sharing the same with Fintechs to consume those APIs to deliver banking services to customers, ensuring compliance will remain with Banks & FIs. So, it becomes critical to integrate regulatory requirements as part of API enablement.
For example, Banks have shared APIs to open accounts and allow third parties to capture details as part of customer acquisition on behalf of the Bank. Adherence to KYC, AML, deduplication, and others must be taken care of during API call from a third party platform to Banks. So, assess all regulatory requirements and build compliance structure as part of the Open Banking model.
Realign organization structure
Traditional organization structure within Banks is evolved around banking functions and branch structure. On the other hand, Open Banking is developed around third parties and partnership structure. Banking services are provided to customers as a shared model. So, it would be vital to also realign organization structure to drive business activities. Changing dynamics of Organization structure for Open Banking Adoption
- Adopts organization of technology company overlaid on Banking operations
- Structure driving agility and empowering team leaders for collaboration & knowledge sharing
- Changing roles & designations – a driving mix of skills & experience
- Technology heavy resources
- Security & Governance part of core structure driving Open Banking Platform
- Performance management KPIs around Partners, APIs
This phase of open banking will continue to evolve at a rapid pace with more and more innovations. Initiatives from Governments such as Sahamati-Account Aggregator will continue to push for more business cases. While it becomes critical for the organization to build and develop Open Banking Strategy and drive adoption in collaboration with Fintechs, it is vital to focus on the right framework with basic principles to drive the initiatives.