Unlocking Global Growth Through Open Banking

Open Banking: First, Some Background

Banking was established as an industry to help businesses and individuals achieve growth and lead better lives via access to capital and other financial services. While we’ve made good progress globally, we still have a long way to go to ensure financial inclusion for everyone on the planet.

Conservative estimates indicate that 22% of the world’s population continues to be unbanked.

Small and medium businesses, another unaddressed market segment, account for 90% of businesses worldwide and over 50% of its total employment. A vast majority of these businesses don’t have access to formal credit. Lack of information, perceived high levels of risk, and limitations of reach are some of the reasons the banks of today give for their inability to serve these markets. In contrast, we’ve seen a technological revolution that’s put a mobile phone in the hands of almost every adult in the world. The convergence of mobility and internet has enabled new business models which are helping address some of the biggest challenges of inclusive growth and environmental sustainability. Today, the financial services industry has a huge opportunity to serve the unmet needs of consumers and businesses by unleashing the power of democratized open innovation. This is possible through the new business model of open banking.

What’s Open Banking And Why Is It So Important?

Through open banking, consumers can give third-party providers access to their financial and non-financial data. This possibility opens up a plethora of innovation opportunities for the financial services industry. It enables a new generation of fintech market participants to collaborate with established banks, leveraging their core banking infrastructure to offer a range of lifestyle and financial services.

The main benefits of open banking are:

•  A better experience for consumers by providing a holistic view of all their information.
• The ability for new third-party providers (TPPs) to offer innovative new services by integrating data from a multitude of sources.
• ntensifying competition to help accelerate innovation and address underserved market segments.

The most easily understood opportunity of open banking is the aggregation of data from multiple sources. And, the biggest area of investment and innovation is in the payment’s ecosystem. The growth of e-commerce paves the way for new firms to develop alternative approaches to deliver seamless experiences. We’re seeing the emergence of business model innovations like buy now, pay later enhancing the overall value proposition of payment service providers. Payment has been the gateway into financial services for many global tech giants. Product and service personalization will be another exciting area to watch as the industry evolves. The ability to aggregate information across multitude of sources, even beyond financial services, will give providers a unique ability to create highly customized products for every individual.

Different Countries, Different Regulatory Approaches

Countries around the world have taken different paths to embrace this new banking practice. The overall approaches adopted by regulators can be classified into three categories.

• Prescriptive - The regulators have laid out clear instructions with firm timelines and requirements for the banks to adhere to. The United Kingdom, Australia, and European Union are proponents of this approach and hence have made the most progress from a regulatory standpoint. These countries have also encouraged competition by giving digital bank licenses which has fuelled the overall intensity of competition.


• Recommendations - This provides a framework and encourages participants to adopt it. The regulators have recently awarded, or are in the midst of awarding, licences to digital-only banks. The market players have responded well and taken bold steps to open up several application programming interfaces (APIs) for industry participants. Singapore and Hong Kong are the best examples of countries embracing this approach.


• Hands-off - In this approach, regulators have left it to the market participants to determine the best way forward. Two of the world’s biggest and most innovative markets, the United States and China, have both taken this stance. And, their progress in open banking has been relatively slow. However, partnerships with technology giants in these markets have, in many ways, compensated for their lack of progress in open banking.

Lessons From A Global Leader

The UK is recognized as the global leader of open banking thanks to its very progressive regulatory regime. It’s also one of the most vibrant fintech ecosystems in the world, attracting $6.3 billion (U.S.) in investments in 2019.

A key catalyst for the growth in UK is the success of the digital-only, or NEO, banks in the country. These NEO banks have amassed over 20 million customers and drive considerable innovation in the market. They’ve generated consumer appeal through their digital-first approach to banking.

The engagement rates on the mobile applications of the NEO banks is considerably higher than their traditional counterparts. They provide several innovative features, like savings and spending trackers, which have gamified the entire banking experience and resulted in high engagement rates.

Open banking has enabled NEO banks to aggregate information across all bank accounts, so consumers have full visibility of their finances. The incumbent banks have also been quite proactive with banks such as Barclays, HSBC offering many of these capabilities. It’s the market adoption of open banking, combined with a very forward-looking regulatory regime that’s helped put UK at the helm of the global open banking trend.

It’s the market adoption of open banking, combined with a very forward-looking regulatory regime that’s helped put UK at the helm of the global open banking trend.

What Does The Future Look Like?

There are three crucial aspects that need to be addressed to unleash the full potential of open banking.

• Security challenges
• Standardization of APIs 
• Leading banks embracing the platform’s business model

Security Challenges

While open banking has many benefits, there’s also growing concern over the potential security risks it presents to both banks and consumers. At the heart of the open banking system is the ability for banks to share data with TPPs via APIs.

The result? Consumer’s valuable data is now more vulnerable because it’s now accessible by a greater number of companies and individuals. An increased velocity of data sharing adds to the risk.

The TPPs will need to ensure that they operate with the highest levels of security that we’ve come to associate with traditional banks. Any breaches at the TPP could result in fraudulent requests for information or payment.

For their part, banks will need to ensure they’re well equipped to deal with any leaks at the TPP  because consumers will contact them first about any fraudulent activities in their bank account. That means banks will need to invest significantly to assess overall risk, as well as comply with regulations.

Standardization of APIs

The varied global approaches to open banking pose a number of challenges to market participants. In instances where regulators have left it open to market forces, agreeing on a common domestic approach or a standard itself is the primary challenge. Then there’s the additional challenge of compliance for banks and TPPs who operate across multiple countries. They have to deal with the confusion and increased cost because policies differ from country to country. For example, in Europe, the EU has enacted the Second Payment Services Directive (PSD2), which requires banks to create mechanisms—most commonly APIs—to provide data quickly, securely, and reliably to TPPs with the consent of their customers.

Regulation, or lack thereof, and compliance is a significant hurdle in the overall development of the industry. A collaborative approach amongst global regulators and the industry association will go a long way to accelerate growth. 

Leading Banks Embrace the Platform Business Models

Many banks have started with open banking as a response to the regulators’ call for enabling access and sharing data. There’s concern about competition from digital-only banks, fintechs, and big technology companies. They need to balance opening up their banking capabilities while also managing security and protecting their business interests.

Open banking should be a growth opportunity rather than a business model that marginalizes them in the market. This may not be the strategy for all of the leading banks of today. Their strategies will evolve as the market evolves. Banks need to modernize their IT, build new organizational capabilities, and get prepared for the platform business model.

Open banking will only flourish at the inflection point when a few leading banks pivot their business model to fully embrace the enablement of others as their core strategy. 

Summary

We’re on day one of the journey of open banking around the world. This transformative business model will change the face of banking in the next two decades. Empowering consumers with the ownership of their information will have far-reaching impact on every industry. It’ll pave the way for the convergence of information from diverse industries like banking, social media, government, and healthcare to name a few.

Central to this transformation will be how we deal with the issues around privacy and security. F5 is fortunate to be at the heart of enabling companies achieve their business outcomes without compromising security. We realize how important collaboration is in accelerating the realization of this vision and welcome opportunities to talk about building a sustainable, inclusive future.