The future of financial services, Open Banking

What exactly is Open Banking? 

Through application programming interfaces (APIs), the banking practice known as "open banking" gives third-party financial service providers unrestricted access to customer banking, transactional, and other financial data from banks and non-bank financial organizations. These third-party financial service providers include merchants, fintechs, currency exchanges, and other digital platforms.  Thanks to open banking, accounts and data from various institutions will be networked for usage by customers, financial institutions, and outside service providers. This way, Open Banking allows players to offer their products, services, and applications to a broader range of customers. It is important to mention that all mentioned data will only be shared once the customer chooses to share this information. 

So, how exactly does it differ from traditional Banking?  

In contrast to Open Banking, the client is tied to the application and service of his bank. Hence, there is a distinct difference between Open Banking and Traditional Banking in that in a “closed” system banking, Banks are the ones that keep hold of their customers ’ financial data. In Open Banking, the data ownership is in the hands of the customers. Only they can consent with whom their data can be shared and revoke this access at any time. In Open Banking, Third parties, TPPs services, interact with banks on behalf of customers. 

In the implementation of Open Banking, Banks have the opportunity to use a variety of business models, such as: 

Bank as a service

• TPP owns a point of contact with customers

• Regulatory Compliance

• Premium API

• Services with added costs and distribution 

Bank as a supplier 

• The bank owns a point of interaction with customers

• Focus on providing services

• Uses data/services of other players via API

Bank as a platform

• The Bank and TRR on the point of interaction with customers

• Building an ecosystem for offerings to end customers

• Building platforms, integrating services TPP

Open Banking provides a range of benefits and opportunities for all parties involved. Including customers, financial institutions, banks, and businesses. Let's take a closer look at the exact possible benefits the financial market of Kazakhstan will experience with the implementation of Open Banking: 

Banks and other financial institutions 

Innovation

• Through the facilitation of collaboration between several stakeholders (banks, fintech firms, tech players, governments, etc.), Open Banking (OB) will speed up innovation. Specifically, Banks and other financial institutions can collaborate with fintech firms to remain competitive in the rapidly evolving financial industry.

• OB will encourage banks to create and provide their customers with pertinent goods and services, including through a larger banking ecosystem. Data exchange between banks and fintech firms increases their technical expertise, keeps them current with cutting-edge products entering the market, and helps them stay ahead of the competition. 

Competition

• OB will encourage competition among traditional banks and allows them to take on banks using new technology. Collecting all that data and making it available to everyone eliminates the possibility of monopolistic power in the banking sector, as it makes it possible for licensed companies to join in in the playground, which was previously only open to traditional banks. These businesses provide fresh perspectives and can develop cutting-edge financial solutions that banks seldom have the means or desire to pursue.

Customer engagement 

• As a result of the competition developing in the market, banks and other financial institutions will be under pressure to improve their offerings. This will help banks to enhance their online services, create fresh mobile applications, and provide simple investing options. The availability of more data through OB makes it simpler to communicate and, to a lesser extent, offer the population enticing services. Moreover, As OB lowers the acquisition cost, it will make reaching more clients from diverse categories possible. This will ensure increased customer engagement and satisfaction for those successful in their digital transformation. 

• Lower customer service expenses for recurring payments, lower customer attrition rates, and the opportunity to cross-sell financial products are all advantages for the bank (Subaio, ApTap).

Customers

Customer experience 

• As mentioned above, OB fosters competition, directly benefiting Kazakh consumers. To be competitive in the market, businesses must guarantee that their customer service is of the greatest caliber. 

• OB moves in-person financial services online, improving the customer experience through value propositions, including speedier processes, better visualization tools, more comprehensive product offers through partners, etc. Financial institutions may better serve consumers' demands by offering guidance, loan details, and more transparent bank transfer management.

• OB will make personalization possible thanks to reliable and comprehensive consumer data, including suitable pricing. As with competition, banks, like other financial services, will be more willing to lower prices to appeal to customers. 

Secure data exchange

• Since an IA system involves transferring financial and other data, solid security procedures for data exchange via API connection are essential. 

• As more participants exchange data and security features become more standardized, open banking will increase the financial sector's transparency. 

• By adding a stronger security layer to all electronic payments through the potential use of strong customer authentication (SCA), which is already in use in Europe, improvements in customer authentication would lower the risk of payment fraud. 

International examples of Open Banking implementation:

Turkey

Bank as a service

Cooperation: Isbank launched the example of open banking in Turkiye with TekCep in 2019

Function: 

• TekCep is an open banking application that makes managing and monitoring cash flow easier.

• Allows commercial account holders to track their time-deposit accounts and POS transactions across multiple banks from a single screen without accessing the relevant banks' digital channels or checking their e-mails

• Garanti BBVA, Akbank, Yap Kredi, VakfBank, QNB Finansbank, TEB, Albaraka, Ziraat Bank, and Denizbank are among the financial institutions whose bank accounts may be monitored via TekCep.

Successes in statistics: 

• ​​According to the data in the integrated report published by İşbank in 2020, TekCep serves 1,500 customers.

Regulatory environment: 

• The decision "Legislation will be aligned with EU Payment Services Directive 2 to strengthen the open banking legal infrastructure" was made in the Eleventh Development Plan, released in July 2019. It said, “Open banking practices in Turkey are subject to certain regulations." 

• "Open banking was first mentioned in Turkish law on July 1, 2020, when the Regulation on Information Systems and Electronic Banking Services of Banks, which specifies the idea, went into effect. 

• The definition of open banking in this regulation did not specify its limitations. Still, it did provide the Banking Regulation and Supervision Agency the authority to issue any subsequent rules in this area.

Bank as a provider 

Swedbank 

Function:

• Improved customer satisfaction and engagement are made possible by Swedbank's subscription management solution, which includes a tool for deactivating or activating subscriptions. 

• Swedbank also discovers all subscriptions through data aggregation from various accounts and cards, enabling customers to track all subscriptions in one location.

• Examines subscriptions, enables cancellation, and allows you to contrast the offerings of other service providers.

• Customers can save money by comparing suppliers and switching service providers online.

Successes in statistics: 

• According to statistics, 40,000 subscriber cancellations resulted in 50 million Swedish Krona savings in a year.

Regulatory environment:  

• PSD2, which became operational in January 2018, permits access to payment accounts held by Account Servicing Payment Services Providers (ASPSPs) by Payment Initiation Services to Providers (PISP) and Account Information Service Providers (AISP).

• The EU has approximately 300 companies that may supply account data or payment initiation services, which were almost nonexistent before PSD2's implementation. AISP enterprises are given the power to access account information upon the request of payment service users.

Bank as a provider 

Bink 

Function: 

• Customers may save and see their loyalty programs in Bink, a loyalty program management tool, and link payment cards to receive points and prizes.

• Customers may maintain all of their loyalty cards in one location.

• Enables users to track points and incentives and sign up for additional subscriptions.

• Feature to connect payment and loyalty cards.

• Customers can obtain information and receive rewards while using their cards rapidly

Successes in statistics:

Partnership with banks: Lloyds Bank, Bank of Scotland, Halifax 

• digitally active customers : 18M

• active mobile app users: 14M

• log-ins in 2021: 4B

Partnership with bank: Barclay

• digitally active customers: 11M

• active mobile app users: 9.7M

• log-ins in 2021: 3B

Regulatory environment: 

• In February 2016, the Open Banking Standard was released. 

• Payment Initiation Service Providers (PISP) and Account Information Service Providers (AISP) are allowed to access accounts opened by Account Servicing Payment Service Providers (ASPS) to initiate payments and collect financial information.

• It has been mandatory for nine major banks (Allied Irish Bank, Bank of Ireland, Barclays, Danske, HSBC, Lloyds Banking Group, Nationwide, RBS Group, and Santander) to migrate to Open API as of January 2018. Others, including Revolut, Metro Bank, Tide, etc., voluntarily adopted the initiative afterward. 

Key Intakes from Global Examples of Open Banking implementation:

According to the global examples, the developed and regulated Open API and Open Banking technologies have already had favorable consequences on financial market players and end users.  Particularly its favorable effects on the growth of competition, public access to financial services, improvement of financial stability, and development of digital financial services and platforms.

Successes supported with Statistics: 

• More than 6 million individuals and corporate clients in the UK utilize Open Banking options. 5 million payments were made via the Open API in May 2022 alone.

• Over 260 registered API users and over 183 million API queries have been made in the EU.

• With a recommendatory implementation strategy, Hong Kong has likewise experienced rapid Open API and Open Banking development. More than 20 institutions, 900 approved participants, and 41,000 API queries each year are involved. 

• According to the Juniper Research British Center, a number of users of open banking worldwide will double in less than three years, compared with 18 million in 2019 – to more than 40 million users, and by 2026 the turnover of payments through third-party service providers will exceed USD 116 billion, as the API interfaces will be serious competition to the usual payment cards.

Written by Yasmin Uzykanova