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How will Open APIs impact the Banking Industry

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Open Application Programming Interfaces (APIs) are gaining momentum in the financial industry and open banking is the trend these days across the globe. Open API means an overtly or publicly available application programming interface which allows programmatic access of a proprietary software application or web service to developers. APIs are sets of requirements that control how one application communicates or interacts with another within a single computer using a method given by the operating system or over an internal/external TCP/IP based or non-TCP/IP based network. 

API enables developers to build applications and services which would be beneficial to banks and other financial institutions. This provides improved financial transparency and provides innovative platforms for banks to create new and customised services. Changing regulatory mandates are giving great freedom for banks to embrace open banking across the globe.

What is Open Banking?

Open Banking is a safe and secure way to allow providers access to your financial information. It gives you a detailed understanding of your accounts and provides newer ways to make better use of your money. This platform enables creation of innovative products/services which would help customers and enterprises acquire better deals.

This includes a newer world of apps and websites in which you can choose specific and unique financial products and services from numerous providers and is regulated by the Financial Conduct Authority (FCA) and European parallels. Customers who are greatly into online and mobile banking can easily utilize Open Banking to discover authorized apps and websites.

Benefits of Open Banking:

  • You can see all your finances in one platform, helps you to budget, find the best deals available and shop for your favourite products and services.
  • Enjoy quick, easy and direct payments.
  • You can use price comparison websites in a more efficient way using open banking. You can choose to provide a regulated price comparison website access to your account information and enjoy results based on your actual spend.

Impact of Fintech solutions in the Banking Sector

Fintech start-ups are greatly disrupting the traditional finance sector with innovative technologies and modern intuitive business models. Fintech is tremendously transforming the way banks operate and is opening newer markets for market-based lending. Fintech managed to penetrate the supposedly saturated finance sector with innovative and connected solutions/services which includes e-payments and online trading. The payments sector is something which is going to face the most disruption by Fintech mainly because of initiation of cashless payments like Apple Pay and Bitcoin.

The impact of Fintech products in Banking Sector is vivid and clear and traditional banking is able to offer new and better products that are relevant to customer needs such as: 

  • Conserving Time
  • Saving Costs
  • Bettering Compliance
  • Lessening Risk Exposure
  • Offering amazing client Experience

Things are moving quite quickly ever since Fintech has hit the finance market and this fantastic game changer is continuously redefining the entire spectrum of how the banking sector engages with high profile customers.

Few Mind-blowing Fintech Statistics:

Gigantic Global Banks like CitiGroup, JP Morgan, Goldman Sachs are the biggest fintech investors on the globe. The future is promising with more and more innovations which we see in crypto and blockchain technologies along with futuristic AI and ML solutions. See these statistics which truly illustrates the real scale of the ever rising fintech industry:

2019 Statistics – Fintech Industry

Nearly 24% of citizens around the globe are very much accustomed with blockchain technology.

As per Goldman Sachs approximations, the universal fintech pie is worth $4.7 trillion.

More than around 12,0000 fintech start-ups are present worldwide.

The prime fintech brand in the world is Ant Financial, a Chinese colossal player worth over $60billion and offering more than 10,000 fintech jobs.

Roughly 46% of huge fintech companies contemplate AI to be one of the most pertinent and emerging technologies worthy of investment.

82% of traditional financial organizations say that they plan to upsurge collaboration with Fintech brands in the coming three to five years.

What are the benefits of Open API? 

Open APIs are greatly encouraged across the world these days because it offers the finest customer experience when it comes to utilizing the newest trends in banking and associated services.

The main benefits are as follows:

  • Ever-increasing digital revenue

Banks need to attain a competitive edge by increasing digital revenue. Since the start of 2018, member states in Europe are compelled to put up with Payments Services Directive regulatory standards. This directive seeks to increase competition within the financial industry by necessitating European banks to release Open Banking APIs so that Account Information Service Providers (AISPs) and Payment Service Providers (PSPs) gets access to customers’ information such as account balance.

  • Data Sharing

Introduction of API within banking service allows businesses and customers enough freedom to access all required banking data in real-time. This offers them accurate information about their finances. Customers can compare with ease, get access to customised resources for making stronger banking decisions and enjoy greater savings.

  • Formation of a new tailored payments’ service

Open banking provides greater access to more and more customer information so that financial services industry can create greater fascinating experiences as and when possible. This also leads to creating better customised payments’ services.

  1. Alliance between banks and fintech

Open APIs enable potential collaborations between banks and fintech. Along with transformation in digital banking systems it will also result in agile processes, accountability of all security/compliance issues and nurture innovation as a culture with much sought out technological expertise.

What are the concerns of Open API?

Heightened risks of sophisticated cyber-attacks are the scariest concern of Open API. Banks are actually in a hurry to invest in fintech related technology, but this attitude makes them slightly vulnerable to issues related to cyber-threats. Cyber criminals are getting stronger each day and the threat mechanism is engineered to skilfully steal precious data and create service disruptions to organisations of any size.

Rigorous Quality checks are essential to help mitigate the risks of exposing thousands of APIs. Testing and authentication of Open APIs also demands greater effort compared to API development.

Data encryption technology is an ocean into which Data scientists, developers and testers should delve, to make sure they get enlightened about the different levels of data encryption. We should also be diligent and aware of the access methodologies which are in practice to control data sharing amongst API customers.

Why banks should embrace open banking?

A multitude of evolving technologies when mixed in the right proportion would help banks modernize their brand technology portfolio. This includes APIs, Artificial Intelligence, easier Mobile Banking, newer forms of Security Authentication and the Internet of Things. For instance, when Apple introduced Apple Pay Cash in 2017 it gave that much needed adrenaline for banks to pursue the latest in technology in order to stay competitive.

Banks should seriously consider embracing open banking as part of their core banking modernization strategy. Here are few key technology trends which would persuade banks to continue embracing Open Banking:

  • External APIs would prove beneficial for banks to improve services

APIs connect mobile apps and other applications to back-end office IT systems and these are widely used since many years to enable new services and contextual solutions. These are relatively difficult to offer without open banking. Banks and fintech are entering into strong partnerships via open APIs which would be driven by regulatory requirements. In this scenario open banking initiatives are encouraged, and banks are coaxed to open up their systems via APIs to third parties in giving access to account information and also to instigate payments. Open APIs can help banks to bring about innovation through agile methods and modernized product approach.

  • Frictionless Mobile Banking Experience

Mobile banking has surpassed standard banking practices in customers’ preference list, and this enables to keep themselves data informed and enrich digital customer experiences. The evolving customer experiences would include intuitive conversational interfaces, customer-to-customer one click payments, customer-to-enterprise frictionless digital banking and newest cryptocurrency opportunities. Apple has been successful in enabling smooth peer-to-peer payments and this puts pressure on leading banks to come up with real ingenuity while crafting new mobile offerings which are easy to use and seamless. 

  • Customer experience would get a latent as well as discernible boost with AI

AI would modernize banks with automated and faster processes thereby improving customer experience by scale and depth. Data has enormous capabilities and with AI technology this capacity is utilized to create tailored services and experiences. AI enabled Chatbots are interesting when customers need a change from the routine conversations with a human agent. AI has tremendous impact on furthering efficiency since robots are 50-90% less costly than onshore & offshore employees, says Capgemini. (source:biztechmagazine ) So, we can expect a positive AI outburst in the yet to be released futuristic apps and related web services.

  • Biometrics would change the face of Security, makes it more Vigorous.

Banks are increasingly on the lookout to add new layers of security to all their services in order to score higher on credibility. Next-gen security-based authentication methods, especially the ones which utilize biometric capability would considerably improve spending habits. Banks are racing harder to extend this authentication metrics using facial recognition and voice prints which would persuade users to transact and spend wisely and in huge volumes using mobile phones and sensor enabled secure ATMs.

Open Banking Strategies

Problem with Traditional Banking is always connected to their inhibitions to embrace newer technologies and they are stuck in a deep-rooted tactical mindset which is largely focused on compliance. But progressive banks embrace open banking philosophy because they know it opens up niche opportunities.

A winning open banking strategy is built around banking capabilities which allows them to build innovative products/services, penetrate new markets with precision and expand the existing customer base.

Here are three effective open banking strategies:

  • Buttressing the Core

Core banking functionalities are to be strengthened to acquire market share and this is no more a secret to banks which are successful in smartly integrating third party functionalities. Most third-party solutions would enable banks to re-invent existing services quickly with limited technical investment. For example, when ABN AMRO collaborated with Tink, a Swedish aggregator they could excite customers with smarter online budget tools and a personal financial management solution which was linked to its existing daily banking product suite.

  • Fashioning a Novel Distribution Channel

The most efficacious fintechs would be the most powerful distributors of tailored financial services. For instance, UK’s MoneySuperMarket is growing from a simple price comparison website to an online distributor of varied and customised financial products which include mortgage loans, credit cards and current/savings accounts. Banks get new distribution channels for their products/services when fintechs help banks open up third party networks. Another thing is that they allow banks to penetrate deeper into budding niches which are otherwise prohibited, this helps with business volume.

  • Launching Ground-Breaking Ventures

Open banking strategizes on starting and scaling disruptive businesses. APIs and third-party functionalities help banks in this aspect specially to build disruptive new business models which operate outside of the bank’s core business. For example Santander rejuvenated its legacy challenger bank, Openbank by adding a cloud based banking backbone with various banking components from inside and across its partner networks. Also, a full API layer was added to provide better ways of distributing banking services. 

Open banking strategies often help banks to avoid legacy constrictions and espouse a modern IT architecture, concurrently developing independent revenue sources. Open banking approach has shown proven results, Payconiq, an account based mobile wallet, Cobase, an aggregator for small and medium enterprises are all live launch examples.

To summarize, retail banks are already geared up to revamp their API portfolios and are on a mission to continuously engage the developer community. Open banking would have tremendous impact in the sense it scales innovation, promotes creative cross-collaboration with third parties and entrench banking functionalities into a different set of systems and services. Prolonged customer loyalty would be the net impact when banks get victorious in expanding their traditional service portfolio using open banking strategies.

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