Open Banking has revolutionized the FinTech world with a new perspective. Its capabilities extend beyond the digital payments as innovations reveal a quicker way to do things and features that go beyond mere convenience for the customers.

Open banking brings the best of both worlds and was initially conceptualized as an outbound trade service that lifts the ceiling of traditional banking infrastructure to provide better customer services. The concept was coined as Open Innovation by Henry Chesbrough who was the Head of Open Innovation at the Haas School of Business. Its aim was to promote sharing of data, which does not belong to a single entity. Later taken up as Open Banking by financial institutions, the core ideologies remain the same, to enable better decision making for the end users.

In its current form, the concept is aimed at providing a common digital platform for various bank computing systems with a common digital language shared via an Application Programming Interface (API). These APIs are what the FinTech start-ups offer to drive innovation across several industry domains.

• Allowing third party developers to build applications and services around a financial institution, a concept around which several FinTech start-ups offer services.
• Facilitating financial transparency for end users with open and private data options
• Using open source technology that is freely available.

So, why was data sharing and customer consent prioritized? Until recent times, banks closely guarded your data and could be accessed only using specific transactions. Therefore, only authorized access could retrieve your data. However, data was still leaked and used for business promotions.

This was the era of screen scraping where data was collected illegally. It was an unsafe, risky and highly inconvenient activity that could collect confidential information and even lead to frequent account blocking. Thus began the movement of giving customers the consent to share data and revoke it whenever needed.

Open Banking APIs were then widely adopted by banks and customers wherein the transaction data is shared securely between the trusted third parties. It has managed to make ripples because it is a sustainable model that is reliable and secure.
On the other hand, with such an advancement comes the need for strict regulations and policies to control the technical aspects of open banking. In addition, there is also the need for new age security controls that adhere to data privacy.

A monumental directive in this regard has been the Payment Services Directive or PSD2 standard for data protection. It is an upgrade on the existing directives in the EU for regulation of payment services and service providers that integrates Open Banking APIs. As more countries are expected to follow suit, this landmark decision marks the beginning of the API era. Along with data sharing in retail banking, it dictates rules for third party connections, sharing information and the scope of this information. Thus, every third party provider will go through rigorous scrutiny to verify authenticity.

Similarly, back at home, India is being touted to be at the forefront of digital payment innovation with the creation of National Payment Corporation of India (NPCI). It led to the introduction of Immediate Payment Service (IMPS) and Unified Payment Interface (UPI).

While both PSD2 and UPI are based on open banking API, they have different frameworks. NPCI was built on top of the Aadhaar Payment Bridge Systems (APBS) and MobileMapper to link Aadhaar number, account number and mobile numbers together, thereby creating a unique combination of three prerequisites. This system has predefined APIs for the banks to connect to a single UPI platform, while NPCI is in charge of inter-bank routing and translation.

There is much that both systems, PSD2 and UPI, can learn from each other. PSD2 needs individual banks to open their systems to others and provide APIs to process payment. However, experts believe that this system can backfire and result in chaos as banks come up with unique security architecture and APIs. Even though these APIs will be compliant with the regulations, they may be complex to implement and integrate.

Like UPI, a central routing and translation system will smoothen the processes further in case of PSD2. The UPI system requires member banks to register with NPCI. Thus, in order to actually be open and interoperable Partner APIs, the European Banking Authority (EBA) has to create a standardized registration process and allow API access to these partners only.

On the other hand, PSD2’s Account Information Service that can empower customers can be implemented in UPI. As banks are the sole guardians of data and do not allow sharing, the PSD2 proposal to open data to third parties in a secured and authorized environment will allow customers to compare services and providers. What’s more, customers will get enhanced transparency of their financial activity.

All being said, the Open Banking APIs are, indeed, developing at a time they are needed the most. Evolving customer expectations, prevalence of FinTechs, and safety concerns have triggered a trend that is here to stay.

Over the last few years, the way banks function has changed drastically. The digital revolution in the financial industry is here and banks have to modernize themselves to stay competitive, irrespective of size. In addition to this, customers today expect more from their banks and are more digitally savvy. They prefer interacting with banks and financial services online, provided security is given. Furthermore, they also expect banks to provide them with a range of non-traditional services.

Here is where the Open Banking model comes in handy. It is designed to help banks meet the changing demands of their customers and have additional monetization avenues. To put it simply, an API (Application Programming Interface) is an interface that allows for easy synchronization, linking, and connection between the database of the service with any application. Such a powerful technology ensures seamless interaction between systems, apps, mobile devices, and applications. APIs for online banking is advantageous to both the customer and the bank – and this is why more and more financial institutions are implementing the same. According to Juniper Research, the number of open banking users is expected to reach 40 million users by 2021.

API integration is already being used by a plethora of institutions worldwide, including private services such as PayPal, wherein it integrated API with Siri. and Facebook, where the platform integrated APIs of PayPal, Visa, MasterCard, American Express, and others. Some applications in need of integration include payments and settlement services, deposits and lending, eTrading and insurance, digital currencies, and so on.

With this as our base, let’s discuss why banks need API integration to expedite growth:

1. Survival:Technology is ever-changing and banks need to reinvent themselves to sustain – this means partnering with third-party apps and products and open banking. It has also become easy for customers to access the products and services of financial enterprises on third-party applications and websites. Banks need to open up APIs and capitalize on such distribution channels for survival.
2. Simplified processes:API platforms simplify difficult steps and allow data to flow easily between different platforms. When this happens, banks need not worry about time-consuming integrations as the complex procedures will be handled by software providers. This will accelerate innovation, save a lot of time and energy, and provide a seamless experience.
3. Convenient and secure:When critical financial data is shared between different parties online, there is a need for data privacy and enhanced security measures. APIs can be developed to ensure convenience along with utmost security. A great thing is that custom APIs can be created by developers that offer secure environments.
4. Aids start-ups: In India, when it comes to the fintech industry, the action when it comes to start-ups is high. This is due to the evolving customer behavior and the popularity of financial services and products online. Start-ups can create innovative products and services and improve their existing products with the help of APIs.
5. Provides benefits: Through API integration, financial institutions can create functional digital services within days, lower their costs, speed up their implementation processes, connect applications to mobile and cloud solutions, give customers an improved experience, and so on.

The way forward:

The future of digital banking is now. Banks need to use and develop APIs if they want to grow their business and make processes easier for customers. APIs have been implemented by a plethora of financial institutions and it has been hugely beneficial for them. For a successful digital banking transformation, the government, banks, and businesses should function hand-in-hand. Building sustainable financial ecosystems with the aid of technological advancements is the need of the hour for our banking systems.

The first wire transfer of funds happened in 1872. Since then, so much has changed – the world adopted ATMs, telephone banking, internet banking, contactless payments, mobile banking, and so much more. And today, we are further making way for a newfangled approach by way of human-centered banking: open banking.

Open banking is a part of financial technology that draws on open APIs and third-party developers to build applications and services that bring about greater financial transparency through open source technologies.

Open banking has fundamentally revolutionized the financial sector. It has made traditional banking services simple, efficient, and convenient, removing additional costs. Markets led by the UK and the EU have already passed open banking regulations with more than two million users of open banking-based products in the UK, a number that has doubled since the start of 2020, despite the disruption caused by COVID-19. Other markets, such as Canada, New Zealand, Australia, and so on, are also on the road to open banking.

Customer demand is now undertaking a paradigm shift, and the expectation from banking models have increased drastically. They want seamless, intuitive, and value-added services along with safe and secure systems and procedures. With more customers understanding the value of their data, banks are forced to opt for newer working models.

Additionally, it unlocks a new way of functioning: for Third-Party Providers (TPPs) to aid banks and companies in providing innovative solutions.

The primary beneficiaries of the open banking landscape are the end-users. The quality of services provided through the spectrum of open banking to customers has improved drastically in the following ways:

• Ability to track changes in bank accounts and receive regular notifications without the need for authentication every time.
• Complete automation when it comes to analytics and budgeting recommendations.
• Execution of transactions via a single interface, even if made through different payment modes.
• Choosing optimal payment methods depending on the offers and discounts available.
• Passing online verification when opening a new account/register.

For banks, open banking can help strengthen customer relations and be considered safe and secure data holders. Their profitability will depend on the ability to fulfill customers’ needs. With open banking, banks can cater to customer needs in a future-proof and agile method.

Open banking also involves educating and engaging customers about the technicalities and the value of their data. . Such transparency will give them access to better services and improved pricing.

Since the concept of open banking is relatively modern, a lot of end-users are hesitant to use these services. It is now up to the government and financial regulators to raise awareness and encourage users to opt for open banking services.

Jim Marous put it aptly: “Having a customer-centric culture is more than just a good thing – it’s become a matter of survival.”

You don’t need a Magic 8-ball to tell you that the time for open banking is now. The question is, have you made the shift?