How Open Banking is Driving the Next Wave of Innovation In Financial Services

If you are a professional in the banking industry, the term “open banking” should not be new. The pull of customer demand for new digital services and a healthy push from regulatory bodies are driving the expansion of open banking globally. 

From a technology perspective, open banking makes use of Application Programming Interfaces (APIs) and Identity Providers (IdPs) to allow for the secure exchange of bank information with third-parties without resorting to Screen Scraping. It has helped to create a new wave of digital partnerships with banks and capture the imagination of the industry. 

Open banking has driven innovation in both multi-factor Authentication and customer consent. This wasn’t a pressing need for earlier iterations of APIs, but it has proven to be a useful contribution from the banking industry to the overall API economy. Other industries that deal with sensitive information or wish to include financial transactions will need to consider how both of these elements are incorporated into their industry.

Are you ready for the next chapter?

What does the next chapter of open banking look like? For banks and other financial institutions that view open banking as an essential part of their digital strategies, they are measuring the health of their ecosystems and are evaluating the next set of updates to be deployed. Of course, their technology roadmaps are also being evaluated so the needs of consumers are met. These leaders are not only pushing technology so that it can keep pace with the objectives of their organizations, but also seeking to move the goalpost for their competitors.

Advancements in runtimes, containers, Integration and other assorted technologies have improved the ability to exchange data internally and externally versus previous generations of technologies. Thus, open banking has also become a “springboard” for movement towards an event driven, Microservice based architecture, which provides a more granular definition of data among other things. Having the right level of API granularity and organizational alignment can create the right building blocks that opens up creative ways to solve customer needs, or it can be the cement that slows down the ability of the bank to be responsive. Competing in this new world means that the technology that supports open banking will need to be more adaptive than ever before. Previous technologies will be pushed to their limit, and will struggle to cope with the demand to change interfaces, logic, integration and other facets of the system.

An open Platform can help, with the ability to support a range of technology partners, so that you can use the latest tools without being constrained by any single vendor. There are open source projects that are good examples of these new types of tools that make it easier to exchange data. This freedom enables your bank to extend the value of the platform and be more responsive in a world that is constantly changing. Also, an open platform does not force the use of a single cloud provider for hosting, so that you are in control of your own destiny when it comes to the commercial aspects of the arrangement. Coupling these architectures and tools with an open platform is a powerful way to ensure that the bank has the technical capabilities to compete in this next chapter.

What is new for the customer?

For the customer, open banking means they have the authority to choose who can access their financial information - like account information, transaction details, etc. with other third parties for a service they want, like buying a house, for example, without filling out basic applicant details such as funding sources, and historical account balances when applying for a mortgage.

New multi factor and risk based authentication methods are expanding the types of transactions that can be safely executed. How does this work in practice? At a high level, developers use APIs provided by the bank to execute a transaction. If the transaction is deemed too risky, the customer will be prompted for a higher level of authentication such as a fingerprint on the mobile device before the transaction is executed by the bank.

What is new for the bank?

Open banking is improving digital experiences by embedding banking products services into everyday activities of the bank’s customers. By linking the bank’s services with APIs, these banks have been able to quickly deploy new capabilities, offering them to their customers, which helps them to not only remain competitive, but also relevant in an increasingly digital world. To cope with accelerated demand in digital channels, banks have been expanding the range of products and services being offered by APIs to others.

What is new for the organization?

Organizations have been on a path to adjust team structures to be more distributed and autonomous when delivering software for the better part of a decade. This is certainly a cultural shift from the traditional top down model of software delivery. Larger, forward leaning financial service organizations have been adopting open source practices internally as a logical next step. All signals indicate that the trend of co-creating software through open collaboration will only grow in the future.

What is new for third parties?

An open banking approach aims to make it easier for the bank to integrate with smaller companies who often have point solutions that elegantly solve a specific customer need. Leading banks have used early learnings from creating an ecosystem of service partners, software providers and external developers to refine their approach going forward so that it is easier to partner with them. They are slowly working through the barriers of partnering with smaller organizations so that a vibrant ecosystem can thrive.

What is new for third party developers?

Having a good developer experience requires the right level of granularity for the APIs that are provided. In addition to the APIs, developers need easy access and solid Documentation. The next chapter in open banking will go beyond developer access but find new ways to collaborate with a truly engaged developer community.

What does the next chapter look like for banks?

As banks look ahead, they should evaluate the changes in the market against the current state of their platform, while considering how well the technology is suited for the demands of digital services by the bank’s own channels and by third party partners. The technology supporting APIs is rapidly evolving with the advent of open source projects. Increasingly open architectures and open platforms are being used to unlock additional value for banks that are pursuing open banking as part of their digital strategy. Working together, they can provide a foundation that accelerates innovation, while also providing the technology necessary to compete in the next chapter of open banking.

Be sure to read the next Open Banking article: Frollo Launches Open Banking API for Australia