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Connecting to APIs will be the main vector through which third-party firms will be able to gather and use customer data. Without delving too deeply into the murky waters of API technology, there are three major types: internal, private and public. They enable newer software and services to interface with much older technology without a dramatic hit to performance. An API layer can be used as a plaster, covering the cracks at the core and enabling traditional firms to open themselves up to newer, more agile, systems.
Open Banking APIs require a change in approach and, some argue, will remove long-standing habits, which some banks view as a threat. A culture of openness is what Amazon founder Jeff Bezos aimed for when he sent the (supposedly apocryphal) internal email telling all staff to get into APIs or face finding another job, and we all know whom the banks view as their main competition these days, don’t we? Banks should recognise that the times have changed and that they cannot hope to do everything themselves.
The man on the street
On the consumer side of things, APIs and Open Banking can create value by aggregating and centralising large portions of their financial lives. No longer will payments, analytics, wealth management, trading and more be separate and disparate entities, requiring their own usernames, passwords, authentication steps and tedious workarounds. APIs can enable a bundling of services into one hub, which in turn cuts down on development costs.
One thing that will need reworking is how PSD2 and Open Banking is perceived by the public. A research report from Crealogix found that 46% of consumers are concerned about the security implications of Open Banking, including identity theft and data breaches. On top of that, 69% of those asked said that Open Banking was a bad idea, based on their concerns over data security. Perhaps adding to the confusion, only 14.3% of those asked actually knew what Open Banking was. Less than a quarter (22.8%) had been told by their banks what the initiative was and how it would impact them.
On the PSD2 side of things, the EC has insisted that personal data processed in the provision of payment services must accord with EU data protection rules. According to the PSD2 recitals, data protection by design and data protection by default should be embedded across all systems. Payment service providers are obliged to deploy security measures that are “proportionate to the security risks concerned”. The CMA also states that data and security standards must take account of the EU’s General Data Protection Regulations (GDPR) and the 4th Anti-Money Laundering Directive.
Banks can really optimise the experience they wish to provide to make it straightforward for third parties to use them
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Opportunity knocks
As ever, there are great opportunities for banks willing to take the lead in the integration of new technology. They begin from a position of strength – already owning a large share of the market, with existing customer relationships, which the CMA has proven are hard to break down.
“The ultimate benefit of Open Banking will be, of course, the innovation,” says Danny Healy, financial technology evangelist at MuleSoft. “What’s important for banks going forward is that it is prepared to nurture innovation, as well as recognise the opportunities when they arise.” It’s hard to see which collaborations will truly shake up the industry, he adds, but broadly, they will come from two avenues.
The first will be banks realising that they don’t just have to be providers of information, but also consumers of information. They would be able to use building blocks provided by other parties, combine them into their own solutions and supplement their existing services.
There are already examples of collaboration: HSBC has announced a partnership with Bud, to offer users of its online-only brand, First Direct, Bud’s financial management tools. Barclays is working with Flux, and NatWest has partnered with FreeAgent, which allows SMEs to track finances and report taxes digitally. Healy states that creating holistic experiences for customers, through personal finance management or other value-added services will be the first battleground upon which banks can succeed.
“If you look at banks, innovation based on technology has been difficult,” he adds. “I think it comes down to the way products had been developed in the past. Certainly, over the last decade, the banking world has been eaten by software. Within a bank there’ll be differing technologies built up over time without a real plan. Quite often they would have been grouped around particular product areas.” Data had been siloed to such an extent, argues Healy, that departments within the bank couldn’t gain access to information held by their own colleagues.
Get with the times
In a world in which the consumer is demanding more agile, flexible services, banks have some of the lowest scores when it comes to perceived modernity. The integration of digital technology – via fintech firms – means that a bank can develop and roll out new products and services at an increased pace. The long-established habit of product delivery required a product or service to be 100% ready, but this is no longer the case. Sandbox environments and beta-testing allows a bank to create working groups of customers eager to test new services and suggest improvements.
Healy says that he spoke with the CTO of a bank who revealed that most customers were happy with the first set of products given to them by a bank upon joining. Yet as the consumer took more
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