Regulation and market forces are combining to fundamentally transform the way that people bank; opening up customers’ payments and banking data to third party financial services providers.
This benefits customers, naturally, because they can share their transactional financial data easier with third parties online. But it also benefits fintechs offering payments services, as well as banks wanting to initiate payments directly from a person’s account as a bank transfer.
In Europe, the Payment Services Directive 2 (PSD2) will require banks to open up APIs to third party payment providers and account aggregators in 2018.
So isn’t this just a European thing?
Competitive forces globally are seeing leading banks leapfrogging regulation to open up their systems and data, and begin to develop ecosystems of partners. The result will be greater choice and competition for customers, and the possibility of entirely new revenue lines for retail banks.
Why would a bank do this? Because they shift from defending their slice of a $4 trillion banking industry and move into an entirely new segment – the digitally distributed consumer economy worth $60 trillion by 2025 (according to McKinsey)
In Europe, banks like Barclays, BBVA and Nordea are not waiting to open up just to be compliant. For instance, Nordic bank Nordea has set up a site for developers to experiment with the bank's Open Banking APIs.
The bank said: "We see this as an opportunity to embrace the changing landscape. Our goal is to strengthen our collaboration with fintechs and go beyond the regulation by providing premium APIs which fit your needs."
The United States appears to be behind in the open banking game, which could be a competitive disadvantage. Chris Skinner, author and financial markets commentator, said that there is real fear in the US of opening up customer data.
“In the USA, there is a move by the big banks to get Washington to outlaw access to bank data based on security. The only person who should access bank data is the customer, the banks bleat,” said Skinner in his blog.
Despite this sentiment Bank of America, Capital One and Citibank have announced they are forging ahead with open banking to various degrees. As I said in an earlier article, banks facing disruption from fintechs are taking the strategic decision to keep these digital enemies close, even so close as to acquire them, rather than risk losing out.
Alasdair Smith, Chairman of the retail banking investigation at CMA, said that open banking is transformational: “For the first time innovative and secure apps will provide personalized services and information to cover all financial needs in one place, and make it easy for people to find out what bank account is best for them.”
There is also a technology barrier; many banks rely on outdated legacy systems that can make access to their data via APIs difficult – if not impossible. Getting to grips with this, as well as the security and privacy issues, will take time and investment – regulatory pressure or not. Banks will be open someday, like it or not.