ARTICLE MANAGING NEW THREE-WAY RELATIONSHIPS UNDER PSD2 & OPEN BANKING
THE RISE OF OPEN APIS MANAGING NEW THREE-WAY RELATIONSHIPS UNDER PSD2 & OPEN BANKING PRESENTED BY FIS & MARKETFORCE The rather dry and legalistic world of regulatory reform isn t usually described as revolutionary but panelists on Marketforce s third webinar in the Regulation Revolution series were clear that the EU s Second Payment Services Directive (PSD2) and the Competition and Market Authority s Open Banking Agenda will mean a complete overhaul of banking as we know it. The way we bank is changing dramatically, said Liisa Kanniainen VP, senior strategic adviser, CM Sales at Nordea Bank Finland. We need to make sure we educate customers because this is a huge paradigm shift. The way we bank is changing dramatically This is a huge paradigm shift Liisa Kanniainen, Nordea Bank As the name suggests, the aim of the Open Banking agenda is to foster innovation and increase competition in banking to improve outcomes for customers. Banks will have to share customer data with regulated third parties using an interface known as an open API (application programming interface). Often described as digital glue, open APIs allow different pieces of software to connect and exchange data. APIs are not new in banking they are, for example, the connective tissue that link mobile banking apps to backend systems - but opening them up to third-party developers and innovators is. The implications for incumbents could be profound. This shifts the bank s role from owning both products and distribution of those products into a role of a pure product manufacturer and collaborator with external third parties who will be distributing those products, said Marijke Koninckx, product marketing manager at global financial services technology provider FIS. And there s clearly a huge hunger in the wider marketplace to finally tap into the banks vast treasuries of customer data. We opened our open banking developer community for registration a few weeks ago and were amazed by the interest, said Kanniainen of Nordea Bank. In the first 72 hours, we got over 300 companies registering, and we re already past 700. This shifts the bank s role from owning both products and distribution of those products into a role of pure product manufacturer and collaborator with external third parties Marijke Koninckx, FIS Challenger bank Starling Bank has already launched a PSD2-ready API, the first UK licensed bank to do so. We have built our open banking platform not only to enable third party
companies to integrate and build off the Starling Platform but also to enable Starling to pull in different Financial Technology services into the Starling Platform, said Megan Caywood, chief platform officer at Starling Bank. The big opportunity we see is to provide more choice and transparency to our customers. BEYOND COMPLIANCE: AN OPPORTUNITY TO FAST-TRACK INNOVATION It s clear that the shift to open banking is likely to act as an accelerant for innovation across the industry. Megan Caywood of Starling Bank explained how over the past five years open APIs had fundamentally changed the way software is created and brought to market and that this will now introduce a new level of innovation and competition in banking. Developers have realised much of the functionality they need to build into their app is redundant to what someone else has already built and rather than reinventing the wheel they can strategically integrate that functionality via APIs, said Caywood. So now what we re seeing is that same kind of innovation being brought into financial services. It means financial technology companies can integrate some of the banking services they see today but can also have new customer acquisition channels and new ways to expand and scale their product. It s going to create a more connected financial eco-system for customers Megan Caywood, Starling Bank Now third parties can build on top of banking platforms to access customer data and provide services it will create a more connected financial eco-system for customers, said Caywood. From our perspective, it will bring them into the hub to provide a gateway to their entire financial life with more transparency and clarity. With all sorts of new players entering the banking industry, from FinTechs to big corporations, PSD2 could create new kinds of models we can t even think of today, noted Kanniainen of Nordea Bank. Indeed, Caywood raised the prospect of experiential banking as banking services are increasingly integrated into social media and messenging apps so that the bank is at the point of need whenever and wherever the customer wants it. CHALLENGES AHEAD: SCALE, SECURITY AND ALWAYS ON With the 2018 implementation deadline fast-approaching, panelists were under no illusions about the amount of work required to make sure solutions are viable, secure and scaleable. It s a lot of work, said Nick Middleton, head of strategy & design for payments at TSB Bank. To build an API is pretty straightforward. The challenge is scaling it to the level we will need and making sure it s secure to protect the customer whose data we are exposing. A good API is just one component of PSD2-readiness. A good API gateway will not address all the issues that need to be tackled, said Marijke Koninckx of FIS. There s still a gap. Can your core systems deal with the number of queries in an efficient way, can you cater for different
formats in a flexible way without having to touch core systems, can you deal with a new three-way relationship and all the entitlements that exist? Koninckx also pointed out that the requirement to be always on will be a challenge for the legacy systems of many banks, which tend to have end-of-day processes that have to run overnight meaning that core systems are unavailable. If you have third party applications that your customers want to use but are only able to use 9-5 on weekdays because outside of that your APIs are not accessible, then it s not going to fly. At Nordea Bank, there s a huge systems transformation underway to make sure the bank is fit-for-purpose in the era of open banking. We are renewing all of our platforms, payments platform, core banking platform, data warehouses, explained Kanniainen. We are rebuilding the whole bank because this change requires everything must be agile and quick. Not all banks have the option of huge transformation project. For those trying to To build an API is pretty straightforward the challenge is scaling it, and making sure it s secure, Nick Middleton, TSB Bank work with what they have and as Koninckx of FIS pointed out, that can mean core systems that are decades old it seems a move towards cloud services is the preferred route to ensure the flexibility and scaleability required to handle the demands of an unpredictable future. WORKING WITH THIRD PARTIES In addition to the systems challenges, there will be issues of culture and mindset that will need to be addressed if developer communities are to thrive and help banks build the best outcomes for customers. Liisa Kanniainen of Nordea Bank noted that PSD2 will brings a very different type of company into the banking ecosphere. Coming from the telecoms industry myself, I know the cog speeds and expectations will be very different. The key will be partnering with the right third parties to make sure innovation adds real value and, importantly, doesn t expose customers to risk. a You want to make sure partners have the same values and culture and are not just out to make a buck, said Middleton. You want them to offer a product or service that complements what you do and make sure they have the right structure and the right risk profile because we do not want to do anything that introduces more risk or liability into our organisation. Koninckx said banks should not fear innovative third parties. I do not think there will be one FinTech out there that will replace an entire bank. They will do a specific service really well, really cheap and with some good valueadded services that need not worry a bank, said Koninckx, citing examples of FinTechs innovating in digital payments for delivery drivers, an area that isn t a direct threat to incumbent banks. The threat, of course, is that third parties with smart solutions and appealing brands could edge out incumbent banks to take control of the customer relationship. Yet our panelists saw
opportunities for banks to actually deepen their existing relationships by using open banking to add more services that will add real value to customers. They key will be to move beyond mere compliance with PSD2 and seek out new ways of engaging with customers. Customers will have to provide consent for third parties to access their accounts, said Koninckx. Now, for pure compliance this could be an on/off switch and you give consent for everything or nothing. But as a bank you also have an opportunity to provide some fine-grained consent models and really allow the customer to take control of this, maybe set spending limits, for example, on a pocket money app. This really ties into the trust element, and it s an opportunity for banks to be in front of their customer again and not just be reduced to back-end system that s just there to service third parties. Liisa Kanniainen of Nordea Bank pointed out that banks retain an inbuilt head-start over FinTechs and other challengers, noting that no-one can predict how customers will react to the proliferation of new providers and new services compared to a long-standing 20-year relationship with an established bank. The value of bank brands is there. Customers do still trust their banks. With banks busily readying for the era of open banking, our panelists stressed the importance of making sure this effort includes a significant customer education piece. Customers may To build an API is pretty straightforward the challenge is scaling it, and making sure it s secure, Nick Middleton, TSB Bank love their friction-free experiences with Amazon and Uber but open banking is a very different matter. This is not like taking a taxi, it s your whole finances, said Kanniainen. And Koninckx of FIS pointed out customers may not understand the issues about sharing their data. There s a whole education exercise that needs to take place, she said. A revolution is coming and while banks are busy getting ready, it seems there s also much work to be done to prepare customers for the changes ahead.
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