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How banks can create a sustainable Open Banking model

(Image credit: Image Credit: MK photograp55 / Shutterstock)

Banking leaders across the globe see open banking APIs as the top technology for the future of banking. In the 2018 Infosys Finacle Efma Innovation in Retail Banking survey, 65 per cent of respondents rated open banking APIs as the technology that will have the greatest impact over the next 12 months. However, the number of banks ready to adopt and profit from open banking seem to be far and few – only 26 per cent of the 300-odd industry leaders said they were well-placed to take significant advantage of open APIs and achieve the business outcomes they wanted.

Since open banking is the future, it is vital that banks evolve a stable and sustainable model for it at the earliest. The following suggestions may help them be on their way:

Look outside the org

Enterprises have always used the application programming interface (API) to facilitate communication and exchange between applications within their organisations. 2018 was the year when the API officially donned the business hat. With open APIs, banks can create new sources of revenue and new ways of delivering value to the customer. This value is a function of network effects and synergies among participants of an ecosystem. Therefore, in the API-led ecosystem-driven economy, the goal should be to scout for opportunities to partner with financial and non-financial providers for customer-centric innovation. There are several ways banks can go about doing this. A bank can, for instance, partner with third parties to expose product innovation. This is exactly what India’s RBL Bank did by partnering with non-banking finance companies and FinTech firms on the road to a 50 per cent annual growth rate in advances. In a first in the UK, in 2016, HSBC launched the developer portal to provide third-party developers access to information and APIs. Today, the bank also offers open banking private APIs for account information services providers and trusted transaction processing parties which allow customers to share data securely and make payments directly from their current accounts. Yet another option is to exploit third party distribution the same way a bank would its own channels. Third party channels include not just conventional channels of other institutions but even things such as accounting packages, ecommerce sites, and messaging payments.

Implementing these strategies may likely call for a change in the way banks approach product innovation, marketing, security and other banking functions. Product development will cease to be solely an internal effort as it should include innovations from ecosystem partners, such as third party developers and FinTech firms. Similarly, a bank’s marketing campaign will run equally on own and partner channels. To mitigate the risks associated with open sharing of data, banks will need to strengthen their security practices and protect the customer data they are mandated to share by open banking regulations. 

Modernise the technology foundation

Adopting new approaches successfully for radically new business and operating models demands a modern core and a strong technology foundation. However, most banks seem to be struggling with huge legacy systems and fragmented IT silos.

In every annual Efma - Infosys Finacle survey so far, banks have lamented about legacy technology impeding innovation. This year, 43 per cent of respondents included it among the top three barriers to innovation; thankfully, 74 per cent said they would be investing in upgrading their technology.

An agile digital business needs dynamic on-demand provisioning of compute resources, and hence must be cloud-ready. What’s more, closed legacy technology estates are not conducive to new open banking realities. Banks need a core that supports rapidly expanding scope and scale, and allows open innovation. A modern technology platform that is agile, open and scalable, is necessary to succeed at open banking. Banks that doubt this can derive confidence from the likes of Singapore’s DBS Bank, which launched the world’s largest API developer platform offering 155 APIs in 20+ categories a year ago, in continuation of its commitment to next-generation banking as the “World’s Best Digital Bank” (chosen by Euromoney). The bank attributes the success of its modern banking initiatives to a rock-solid foundation of core systems.

Enforce accountability

A bank will never be able to achieve its desired outcomes if it does not track them from the beginning. While it can make a soft start by monitoring simple metrics, such as the number of APIs or ecosystem partnerships, the ultimate goal should be to quantify meaningful impact in terms of an increase in revenue, profit or customers. What this means is that, indicators of value delivered cannot be the number of new customers gained, but how these customers use a service or derive value from a service. A clearly identified individual – a head of open banking perhaps – should be made accountable for outcomes.

In a world under constant threat from sophisticated hacking practices and data breaches, it is also the responsibility of banks to ensure that their privacy, ethics and security policies protect the data and interest of their customers. Successful banks in the open-world will go beyond merely complying to the GDPR or evolving regulations, to make privacy and ethics an integral part of every process, system and practice of their business and organisation. Robust governance as they expose more and more APIs, and enhanced security controls for every interaction with partners, third parties, and vendors will be paramount. Lastly, banks will also need to adapt their practices for the rise of the gig economy and the changing workforce. With the influx of part-time workers in banks, the importance of ensuring proper controls for data and information exchange cannot be stated enough. Educating the workforce – full-time and part-time – about best practices for handling data, and the risks and repercussions of even accidental record exposures will be a necessary first step.

No doubt open banking will bring some challenges, but banks should simply take them in their stride and focus on the opportunities instead. In recent years, non-banking disruptors – from small FinTech firms to technology giants – have shown what they are capable of and are now going all out to profit in the open economy. Incumbent banks must act with agility in order to hold their own against these rivals.

James Buckley, Vice President and Director, Europe – Infosys Finacle
Image Credit: MK photograp55 / Shutterstock