The World of Open Banking

WHITE PAPER

Abstract Open Banking has set the pace for systemic transformation for the banking industry. It is poised to transform not only how banks function, but how and even why consumers and businesses choose their services there by catalyzing innovation in the services. The global enthusiasm surrounding Open Banking has been at a fever pitch, with all the major economies taking a close look at benefits it is poised to bring for the customers. In this white paper, we look at the broad category of drivers which are fueling this evolution in banking and the risks and challenges it poses for incumbents. We will also look how are the banks and other players are exploring new avenues to boost revenues and take on this challenge to ensure their positions remain secure in the value chain. 1. Open Banking – An Overview

Year 2018 has been marked as an information and its banking services. While it is poised to fundamentally change important year for retail banks in European Banks will be obligated to grant access of the payment value chain and the business Union (EU) as the Payments Service customers account information to third models for the players, it has also acted Directives (PSD2) implementation has party providers there by enabling them to as a catalyst for industry’s willingness finally gone live. It took many years and build financial services on top of this data towards embracing the framework revisions since the regulation was first and bank infrastructure. For the customers, called ‘Open Banking’. The framework conceptualized to reach the current both consumers and businesses, it means encourages collaboration between banks state. In a nutshell, PSD2 regulation is using the services of third party providers and other players within the banking eco set to open the doors to any company to manage their finances, make payments system through adoption of common to provide financial services by ending while the money still stays safe in their standards for data sharing and exposure of bank’s monopoly on customer’s account current bank accounts. banking services.

While EU and UK may have paved the way with the ultimate aim of benefitting the driven. The data table below presents a for this radical change, many other markets customers with better financial outcomes. view of what other countries have been around the world have taken a note of Broadly two approaches are being followed doing. this and are adopting similar principles worldwide – market driven and regulation

Approach Country/Region Initiatives

• Competition and Markets Authority (CMA) came out with the ‘Open Banking’ project in 2016 UK • The CMA set a deadline of January 2018 for the UK’s 9 largest current account providers to open application programing interfaces (APIs) for their corresponding current accounts

• European Banking Authority(EBA) came out with the revised Payments Services Directive (PSD2) in 2015 to be effective in the (Single Europe Payment Area) SEPA Regulation EU • In Germany, current account APIs are already in operation for processes like onboarding and driven approach credit scoring • Regulatory Technical Standards(RTS) are set to come into force from Q3 of 2019

• The Consumer Data Right Act (CDR), a general right being created for consumers to control Australia their data, will allow consumers to share their banking data with authorized third parties their choice

• The law regulating Financial Technology Institutions (‘FinTech Law’) became effective in March Mexico 2018, setting the stage for the Open Banking initiatives

• An US Treasury report in published in 2018 has recommended developing regulatory approaches to enable secure data sharing in financial services USA • Large banks being aware of the strategic implications of Open Banking are getting into data sharing agreements with API standardization program

• In May 2017, the Amended Banking Act introduced a registration system for Third Party Japan Providers (TPPs) and required banks to publish their open APIs policies while encouraging Market driven banks to contract with at least one TPP by 2020 approach • Monetary Authority of Singapore (MAS) and The Association of Banks have published an Singapore API Playbook aimed at supporting data exchange and communication between banks and FinTechs

• No central directive but numerous API driven initiatives like central authentication, P2P and India instant payments networks are supported through the Unified Payments Interface (UPI)

• The Canadian government launched an Open Banking review in February 2018 seeking to Canada explore the benefits and risks associated with the same

• New Zealand is developing their version of Open Banking framework primarily through the Others New Zealand voluntary cooperation of its major banks and other financial services players

• The impact of PDS2 is being closely observed and as similar regime may be implemented South Africa based on the successes of PSD2

• Regulatory mandate – Governments laying the foundation on which the • Increased competition - A gamut of are now taking a proactive approach in Open Banking system is based. The use players backed by technology giants “democratization” of financial products of cloud-based platforms will add to the like GAFA – Google, Amazon, Facebook and services. The lead in this direction agility, flexibility and scalability of the and Apple – have come into the fray of was taken by EBA in the EU by adopting institutions’ capabilities and round the financial services offering. Such players, the PSD2 in 2015, formally ushering in clock availability of the banking services. called fintechs, are offering faster Open Banking. A year later, the U.K.’s payment solutions, while facilitating the • Changing customer expectations - CMA issued new guidelines requiring seamless integration of cards, e-wallets The advent of mobile devices coupled banks to implement Open Banking by and other payments types ramping with high speed internet has resulted 2018. These mandates are compelling up competition for the banks. In fact, in a hyper connected world aiding the banks to open up their proprietary data these players are more than ready to growth of firms viz. Google, Amazon, to third party providers. offer their services in the Open Banking Facebook, Uber, Netflix and others who ecosystem. According to a survey in • Technology fueled innovation – Rise offer customers a rich user experience, the UK, 94 percent of fintechs see Open in the number of smart devices and the customized products and services and Banking as a major opportunity while shift to instant payments, are opening multi-device round the clock availability. 81 percent are actively preparing for the up new opportunities in financial Customers are increasingly demanding opportunities it presents[8]. services. Along with this, the growth the same experience from the banks of APIs - which allow systems to be making a very strong case for adoption interconnected with each other- is of Open Banking across the globe.

The Open Banking ecosystem is aimed value for SMEs giving better visibility of opportunity to incorporate product at customer benefits and is slated to their cash flows and liquidity positions. and service features from third-party bring in a host of changes in the banking RTP will also catalyze the Peer to partners into their own offerings environment driving values for the Peer(P2P) payments, bill payments and through APIs as a plug-and-play model. customers and the industry stakeholders at e-commerce payments space. According By bundling such readily available large. Following section enumerates some to an industry survey payments and services from TPPs and vice versa, banks of the compelling value propositions of the cash management were the top can rapidly enhance personalization changes brought about by Open Banking business areas which Open banking of customer service, build customer envisages to deliver: can improve thought 25 percent and 21 loyalty, generate new revenue streams percent of the SMEs respectively[9]. Also, and lower banks’ operating costs. • A Seamless Experience - With potential 22 percent of the large corporations Furthermore, banks can reduce the risk convergence of Open Banking and also think payments could be improved and cost of experimenting with newer Artificial Intelligence, user experience through Open Banking[9]. products simply by adopting this plug- is set to be all the more digitally and- play model of integrating APIs of transformed. Streams of data from a • Data sharing prompting product third parties with their core products on multitude of sources will converge, innovation and financial freedom – their digital platform. allowing service providers to gauge With Open Banking, banks are required the exact customer sentiments and to share their customers’ data with • Rise of non-banking Third Party requirements allowing for highly authorized third parties. This is expected Providers (TPPs) – In the Open Banking customized financial offerings. Many to make the players come up with better ecosystem, banks will not only be cumbersome procedures are also financial products as firms will use this competing against banks, but against expected to become simplified and data to derive customer insights and everyone offering financial services. automated. With access to the banking consequently become more innovative Like in Europe, PSD2 is set to give rise to APIs, fintech firms can provide users with and customer centric. By taking on two TPPs in the financial space – AISPs opportunities to improve their financial the new roles of Payment Initiation and PISPs. AISPs will have access to the lives by providing newer services like Services Providers (PISPs) and Account account information of bank customers. financial planning and insights based Information Service Providers (AISPs), Further, such service providers could on the data. In essence, banks and other European banks can create new product analyze a user’s spending behavior financial institutions will be able to and service propositions potentially by aggregating customer’s account create unique financial profile of each amplifying banks’ reach and distribution. information from several banks into customer based on their financial data For example, iDEAL is a PISP created one overview. PISPs on the other hand and forecast their consumption patterns by a consortium of Dutch banks which are the ones who will be initiating a and behavior leading to product facilitate online inter-bank transfers. payment on behalf of the customer. The customization much more efficiently. For best use cases for PISPs are in the areas • APIs enhancing cross selling and instance, the Bank Account Starter API of P2P transfer and bill payment. cost optimization opportunities - by UK’s Capital One allows customers to Open Banking presents banks with the share basic information, retrieve account products’ details, as well as apply for various kind of products in a hassle free manner right from a third-party site.

• Real time payments facilitating easier treasury and cash management for SMEs - Open Banking will enable payments to become almost real time, as TPPs will be able to aggregate all payments into one digital interface. One key implication is for SMEs, who typically do not have their own treasury departments unlike their larger counterparts. Real Time Payment (RTP) promises to transform treasury management services creating immense

External Document © 2019 Infosys Limited External Document © 2019 Infosys Limited 5. Risks, Challenges, Opportunities and Strategies banks to succeed in the Open Banking ecosystem 5.1 Risks and challenges parties come with the inherent risk of their customers may seek out the The Open Banking initiatives have opened of data security and breaches. A lack convenience of digital aggregators up a host of new challenges and risks of homogenous technical standards (TPPs) resulting in migration of their for the incumbent banks which can and data sharing formats may make accounts and the profit pools along have far reaching implications of their operating processes susceptible to with them. It is estimated that in the business prospects even to the point of an security breaches and fraudulent UK alone, 10 to 20 percent of banking existential crisis. Some of them are enlisted activities. With complex chains of data profits could be at risk of disruption and below: access, banks have to heavily invest into within the next five years, somewhere risk mitigation and security initiatives between £1-£2 billion of annual pretax • Rise of new competition – The which can have significant implications profits could be under threat from incumbent banks are confronted by on their costs. Yet, banks cannot afford disintermediation[10]. non-banking fintechs which are pure to lose the revenue potential of these • Risk of losing customer relationship digital entities such as GAFA. Such data streams in the Open Banking - Open Banking will bring the banking tech-savvy firms are luring customers ecosystem. by offering unbundled, innovative information and payment services into and engaging financial products and • Risk of Commoditization - With open one single interface from the bank’s services. Most incumbent banks are APIs, incumbent banks are increasingly purview into the ambit of AISPs and saddled with legacy system, yet if they running the risk of being commoditized. PISPs respectively. This will hurt the don’t meet this threat head-on, they risk With many of the existing barriers to banks as it will result in loss of direct the prospect of erosion of market share, switching account providers ceasing relationship with the customer and increased customer churn and pressure to exist, Open Banking is allowing becoming a utility service used by the on margins. customers to switch between current TPPs. Since the customer touch points account providers and shop around would be owned by TPPs, it implies loss • Data Security - The financial data being for other products based on price only. of customer insights and data and hence shared through the APIs to the third Banks face the prospect that many opportunity loss for cross-sell.

External Document © 2019 Infosys Limited External Document © 2019 Infosys Limited 5.2 Strategies for banks in the era Monetizing access to APIs through customers’ needs and financial position. of Open Banking joint offering developments is another Credit scoring can become more precise promising area of future revenue stream. as well as pricing of loans and other Even with all the above challenges, BBVA of Spain has created PayStats, products can refined and curated almost the horizon is not that bleak for the an API that delivers aggregated and on a one-to-one basis. incumbents who are willing to evolve. In anonymized transaction data from POS fact, by 2022, the Open Banking market is • Marketplace like ecosystem between terminals and cards to third parties. expected to generate £7.2bn of revenues bank, merchants and consumers in the UK alone[11]. Another estimate • Focus on 360-degree experience – – Collaboration and partnership by suggests, that even as early as 2020 could There is need to close the gap between the banks with other the TPPs and see the banks who transform digitally to the banks service offerings and the merchants can create a marketplace adapt to Open banking could generate customers’ expectation. With Open like ecosystem. The financial products up to 20 percent more of their current Banking, financial services providers as can be bundled with other non- lending revenue pool and 21 percent of the have the chance to offer bundled financial products creating cross-selling corresponding current account revenue services to meet the unfulfilled needs opportunities. In fact, 89 percent of pool[12]. of SMEs and corporates. Moreover, banks are ready to build an ecosystem they have the opportunity to offer platform with third-party services which • BaaS and BaaP – Banks can become personalized, value-added services aims to benefit their SME and corporate platforms (Banking as a Platform [BaaP]) enabled by Open Banking at a fraction customers[9]. DBS of Singapore offers a with an API-enabled network of partners of the cost. It is imperative to use data one-stop online market for its customers on which value-added banks’ core effectively and efficiently to create who are looking to purchase or sell cars services can be bundled together with a holistic, 360-degree view of the through its Car Marketplace. those of TPPs offering advisory, business management along with traditional banking services. This integration will allow service providers to use data and Conclusion anticipate a SME client’s needs allowing It is evident that Open Banking will • Expand the traditional service portfolio best-in-class financial services product fundamentally transform the financial through building strong API portfolio suite. On the other hand, for larger service value chain by the way of fostering to engage the developer community, corporations, the Banking as a Service innovations and encouraging new business promote cross collaboration through model will potentially amplify the ability models. The emergence of fintech will marketplaces to connect to multiple banks, while usher collaboration there by helping to boosting efficiencies. In India, ICICI bank • Adopt the Banking as a Platform (BaaP) create a new ecosystem in which banks in India has created a platform called model with an API-enabled network of role will shift markedly. It also raises issues InstaBIZ with the sole focus on MSMEs. partners on which value-added banks’ It offers a wide range of services around regulation and data privacy and core services can be bundled together digitally including instant overdraft and hence the adoption by various countries with those third parties, offering business loans, easy bulk collection and varies in their approach towards the advisory, business management along payments of funds, automatic bank implementation. However, irrespective of with traditional banking services. reconciliation as well as inward and the geography, the momentum towards outward remittances. MSMEs who are open banking is high and requires banks Infosys can help banks transition to a not the bank’s customer can use InstaBIZ and fintechs to position themselves platform model by offering a broad and use the facilities too. alongside each other for ensuring success selection of open APIs and applications, • Monetize data and APIs - With the vast in the emerging environment. facilitating engagement with FinTech firms, amount of data stored by banks, there building an applications marketplace, as The imperatives for banks to create long is immense scope to apply analytics well as creating a core banking-agnostic term avenue for growth are: to understand customer behavior and omni-channel hub through which banks identify commercial opportunities. Open • Augment the existing set of offerings can distribute their own and third party Banking regulations provide banks by reinforcing the core through partner products. with the unique opportunities where collaboration with third party providers they can partner with ERP providers there by creating new value proposition and fintechs to monetize the access to through service integrations data. Orange Bank, for example, offers value-added data services in this way.

7. References 1. https://www.pwc.co.uk/industries/financial-services/insights/seize-open-banking-opportunity.html 2. https://www.redhat.com/en/blog/apis-are-not-enough-percentE2percent80percent93-open-banking-all-about-building-ecosystem 3. https://www.bain.com/insights/coping-with-the-challenge-of-open-banking/ 4. https://medium.com/@PlatinumQDAO/open-banking-will-change-the-financial-services-industry-forever-fd3d93d4f9e6 5. https://www.oliverwyman.com/our-expertise/insights/2017/sep/ecosystem-thinking.html 6. https://www.bcg.com/publications/2018/retail-banks-must-embrace-open-banking-sidelined.aspx 7. https://www.finance-monthly.com/2018/12/the-era-of-open-banking-opportunities-and-challenges-for-2019/ 8. https://www.ey.com/en_gl/banking-capital-markets/how-regulation-is-unlocking-the-potential-of-open-banking-in-the-uk 9. https://www.accenture.com/us-en/insights/banking/open-banking-businesses-survey 10. https://www.forbes.com/sites/baininsights/2018/03/15/why-big-uk-banks-are-worried-about-open-banking/#760c08544504 11. https://www.paymentscardsandmobile.com/open-banking-market-could-be-worth-7-2bn-by-2022/ 12. https://www.accenture.com/ma-en/insight-open-banking-brave-new-world

About the Authors

Rohan has over 18 years of program management and consulting experience across Financial Services, Manufacturing, Insurance and retail industries and specializes in digital customer experience and digital marketing space. He has led multiple large digital transformation programs and focusses on helping customers achieve success through better and innovative customer experiences via digital channels.

Sounak is part of Domain and Functional Consulting with Digital Experience practice of Infosys, with over four years of experience. Prior to joining Infosys, he has worked with Wipro Limited and Swiggy for solutions delivery, IT service management, client engagement and business process re-engineering. His areas of interest include financial services, operations management and emerging technologies.

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