More than four decades later, the trend towards opening continues strongly. Today, open banking is an umbrella term that refers to legislation and technologies that allow bank customers to consent to third-party providers (TPPs) accessing their payment account information or making payments on their behalf.
But how does Open Banking work? Digital interfaces, Application Programming Interfaces (APIs), create the technical basis for it. APIs are crucial in a digital economy dominated by ecosystems and platforms. They enable the efficient scaling of digital marketplaces, but also the integration and monetization of products and data in completely new contexts. Like Lego bricks, APIs allow products to be rethought and changed over and over again. Ultimately, they accelerate the product development of companies. New products are no longer implemented only by in-house developers, but also by external programmers.
This brings us to two more important concepts: open finance and embedded finance. Open finance broadens the concept of open banking to savings and securities accounts, advanced payment functionalities, and other types of data or assets such as loans, mortgages, or insurance policies. It goes beyond the initial scope of PSD2-based open banking, which is why open finance APIs are considered “premium” or “value-added services” that could be eligible for remuneration in the context of a scheme.
Embedded finance is best understood as integrating a financial service or technology with a traditionally non-financial service, product, or technology. In practice, this means exposing financial products and services as modular APIs that can easily be re-used by third-parties. From a customer perspective, this implies that financial products are increasingly delivered contextualized, at the point of need. Embedded finance propositions often leverage open banking (and, in the future, open finance) API infrastructure to streamline specific parts of the product experience, e.g., identity and affordability checks.
The opening up of financial institutions, in the past the focus was mainly on opportunities and risks, today access to extensive financial data, helps banks improve current and develop new features, which can drive down costs or generate revenue. It also provides customers with greater access to a range of financial services from a larger number of providers. While PSD2 can be seen as the regulatory starting point, open banking goes further. While PSD2 focuses solely on payment accounts in a well-defined regulatory framework, open banking can include investment accounts, business accounts and APIs not in PSD2. In essence open banking is broader. What defines it is digital strategy, access to data and functionalities that a bank or financial institution is giving.The API programme is a great example of how technology is becoming an enabler for a new business model. The technical prerequisite for embedded finance solutions is the use of an enterprise-wide API platform. On this basis, new products can be developed quickly and flexibly. The decisive factor here is that technical services are continuously created within the company that can be made available externally via APIs. The implementation of an “API-First” approach is critical to us. Whenever a new digital product is developed, either existing APIs and components should be used or the necessary interfaces should be developed at the same time.Data has always been the foundation for banks to conduct business and support clients. Banks have access to plenty of insights – into cash flows and transactions, market data and knowledge, and risks. In addition, they also have the know-how to operate in one of the most regulated industries. Which is why there can be absolutely no compromises with respect to data protection or data security – this applies to both client data and its own data.
It is also worthwhile considering the challenges that lie beyond technology and IT for Open Banking. APIs are only the technical foundation. The key challenge is to develop solutions for partners and ultimately for the end customer to accelerate and simplify processes or create completely new possibilities. It is here that organisations face numerous challenges. These concern the technical development and marketing of digital interfaces, communication with internal and external stakeholders, but also the necessary internal transformation.
As boundaries between the industries become increasingly blurred, the players who will be successful are those who understand how to build products from building blocks of different industries that revolve around the customers’ life situations.
The author is CEO Deutsche India and Global CIO Corporate Functions.
