To understand the banking transformation from conventional to digital, let us take a brief look into how the transformation came about. We have ample examples from banking history where a cumbersome regulatory directive has actually opened doors for transformational opportunities, resulting in newer business models.
The Payment Services Directive 2 (PSD2), General Data Protection Regulation (GDPR) and UK Open Banking are some regulations that are driving banks to open up their customer’s data to third parties. This is a paradigm shift for banking industry’s previous regulations’ prescribed measures for customer data protection, security, privacy and secrecy.
Banks have conventionally been viewed as stewards guarding and protecting their customer’s data – which they have assiduously tried to refrain from sharing or monetizing. With the PSD2 mandates on data sharing and GDPR setting up a single data protection framework, banks have been required to relook into the organization structure, processes, as well as the adaptation of IT architecture.
The Banking industry has a conceivable skepticism regarding Open Banking regulation. It is believed that it tampers with their unique position in the financial ecosystem and opens up new competitors that are not other established banks, but upstart niche product sellers as well as supplementary financial service product companies. Banks have already been using internal APIs for enabling data access across internal banking functions, enabling customers to subscribe to personal financial management software and to connect to Visa or Master payment networks. While these APIs serve as a conduit to share information, adopting Open Banking would mean the transfer of transactional information, along with monetary balances. This aspect also brings the risks associated with data sharing. Acceptance of the Open Banking model would also involve creation of a new set of processes, governance and record keeping of customer consent and permissions.
Whether driven by regulation or not, banks are contemplating if the Open Banking business model should be adopted. On the flip side, it involves a lot of developmental effort for the bank, such as:
- Transferring the onus of data privacy to the customer.
- Educating the customer on the implications of consent and data sharing.
- Investment from the bank to make this consent process transparent and storage of this consent as required by regulation.
- Reputational risk in the event of intentional or unintentional misuse of customer data.
- Flagging the ‘purpose’ of the data.
- Deleting data or ‘forgetting’ the customer after a specified period.
The perceived benefits to weigh against these factors are:
- Adopting a collaborative versus a competitive approach could be beneficial to banks. They can offer innovative products in collaboration with fintech companies, thereby saving costs on building these new products on their own.
- Complementing parts of their processes which take a longer turnaround time with readymade products (like underwriting).
- Selecting partners who would complement or augment their offerings, thus providing superior value to the customers.
- Having ready access to customer preferences like buying habits, risk appetite and financial goals. Harnessing these insights can make banks suggest proactive offerings to the customer, consequently enhancing customer experience.
Taking Initial Steps Towards Open Banking
Like in any new strategy adoption, the following factors should be considered:
- An alignment between the Business and IT Strategy.
- A business impact analysis to assess the cost and benefit of building an Open Banking framework. Banks have already been using internal APIs for enabling data access across internal banking functions (Internal APIs) for enabling customers to subscribe to personal financial management software and to connect to Visa or Master payment networks (Partner APIs).
- A standard for API design guidelines which will be easy to access and consume, has to be identified. This cover a range of considerations like data standards, info security standards, interoperability, reuse and flexibility.
- A decision should be made about developing the standard internally or outsourcing to an expert API services provider.
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