Open Banking v1

WHITEPAPER

Open BankingUnboxing a ubiquitous trend that is here to stay

TABLE OF CONTENTS

02

Overview

Open Banking Global Scenario

Open Banking Market Outlook

Open Banking Post-COVID-19

Key Drivers of Open Banking

Growing Role of APIs in Banking and the Need for Standardization

API Use Cases in Banking

Challenges in Adopting Open Banking

Conclusion: The Future Belongs to an Open Banking World

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WHITEPAPER | Open Banking

The financial services industry has witnessed more disruption than any other sector over the past few years. In today’s dynamic marketplace, customers rely on digital banking experiences more than ever to make critical financial decisions. Financial institutions are turning to digital transformation to drive greater transparency and innovation in order to deliver more customer-centric banking experiences.

Open banking has recently become a buzzword for the banking industry. Let’s unbox this ubiquitous trend that, according to subject matter experts, is here to stay. Open banking is a banking practice that provides third-party financial service providers open access to consumer banking, transaction, and other financial data from banks and non-bank financial institutions through the use of application programming interfaces (APIs).

In an open banking ecosystem comprising banks, customers, third-party developers, FinTech companies, and partners, all have access to business functionalities, data, and processes through APIs. In open banking, the customers have ownership over their data held by financial institutions under custodial capacity. The customers have the freedom to direct the financial institution to make their information available to a third-party.

In the modern banking landscape underpinned by open banking, banks no longer have exclusive access to their customers’ information. New regulations mandate that this information be made available to third parties through APIs. Open banking has empowered startups and aggregators to innovate, improve customer service, and lower costs by breaking the incumbent banks’ monopoly on payment mechanisms.

03


OVERVIEW

Payment Services(PISP)

Account Services(AISP)

FinTechPartners

Bank Apps &Experiences

Payment Networks

Customer Data

LendingCore Banking(Accounts)

Other BankAPIs

Open Banking APIxPSD2+OBWG APIs

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04

In the European Union, the Payment Services Directive 2 (PSD2), a European regulation for electronic payment services introduced to make payments more secure, is striking evidence of APIs’ growing importance in the banking sector. The PSD2 regulation requires banks to provide third parties with open access to their back-end services through APIs.

In the UK, the Competition and Money Authority (CMA) regulation requires the nine largest banks to provide open access to payment accounts through APIs. Simultaneously, to reinforce the safety and security of customers’ information shared through APIs, the European Union has introduced the General Data Protection Regulation (GDPR).

OPEN BANKING GLOBAL SCENARIO


05

In 2013, the Euro Banking Association (EBA) launched the Electronic Alternative Payments Working Group (eAPWG) to focus on innovations in alternative electronic payments in the consumer and retail e-commerce vertical. Subsequently, after being renamed as Open Banking Working Group (OBWG) in 2016, the group’s focus shifted towards the strategic implications of implementing Open Application Programming Interfaces (APIs) in open banking.

The US federal government’s General Services Administration (GSA) has released a standard set of APIs to consistently drive open data initiatives. These government standards are designed to promote best practices for API design, development, and management.

Recently, the Australian government, accepting the Farrell Report’s recommendations, made a similar announcement of banking data opening through APIs, but with a broader scope than PSD2. The Australian government has established the Consumer Data Right (CDR), which formally gives consumers exclusive rights over their data and enables them to direct their use seamlessly.

The world’s leading financial services companies are transforming their business models by developing open banking platforms in order to drive internal and external collaboration to find new ways of serving their customers and expanding their outreach beyond their business’s four walls.

In the Philippines, GCash has emerged as the country’s leading interbank payment transfer service, offering no-margin transfers through a mobile application. However, GCash makes up for the revenue gap with other in-app services such as applying for new credit cards and loans, mobile wallet recharge, and bill payments.

In March 2018, Mexico took the first step towards adopting open banking by bringing legislation to authorize regulators to draft the guidelines to permit financial institutions to share user information through APIs.

In Singapore, the Monetary Authority of Singapore (MAS), in collaboration with the Association of Banks, published the “Finance-as-a-Service: API Playbook” in November 2016, which identified 411 APIs covering banks, asset management companies, insurers, and government agencies.

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As per the Allied Market Research report, geographically, North America holds the highest share revenue-wise, accounting for two-thirds of the global open banking market share. The report says that while the open banking market generated $7.29 billion in 2018, it could reach $43.15 billion by 2026, growing at a CAGR of 24.4% from 2019 to 2026.

While North America will, in all probability, retain its place as the frontrunner in the open banking market during the forecast period, Europe could witness a CAGR of 24% during the said period. Enhanced customer engagement with open banking APIs and the rise in the banking sector’s adoption of technology will be among the prominent growth drivers of the open banking market. However, on the flip side, lack of awareness and data security concerns continue to hinder the market growth.

OPEN BANKING MARKET OUTLOOK


07

To support small businesses in their recovery post-COVID-19 and improve long-term resilience, Intuit QuickBooks launched a host of digital tools powered by open banking APIs. An analysis from TrueLayer found that the use of open banking payments has surged during the lockdown. With the help of Payment Initiation (PI) payments for goods and services online has grown by 832% between March 2020 to July 2020.

Open banking adoption would see a formidable rise as the consequences of COVID-19 shape behaviors in the long-term, such as increased social distancing and preference for online transactions. Customers prefer open banking platforms as they can carry out transactions and online purchases without divulging their sensitive information, thereby reducing the risk of fraud.

OPEN BANKING POST-COVID-19

Banking Perceptions as the consequences ofCOVID-19 shape behaviors and lives long term

I would allow third parties access to my data

Sweden Americas Middle East, Africa, India

Europe Asia Pacific

I would allow third parties access to my data

Middle East, Africa, India

Asia Pacific

Americas

Europe

Sweden

Online Purchases Borrowing Money Debt Advice Automated Borrowing

27% 17% 16% 15%

31% 12% 10% 9%

28% 12% 13% 11%

44% 9% 10% 9%

29% 10% 10% 10%

65% 54% 65% 69% 85%


08

Financial services providers have been facing considerable challenges for the past few years, but at the same time, new opportunities are emerging, leading to the creation of future profit pools. The following three key factors that are driving open banking include:

KEY DRIVERS OF OPEN BANKING

The demographic cohorts, including Millenials, Generation Z, and Generation Alpha, are leading the change in customer behavior, compelling financial institutions to innovate their product offerings. For example, banks need to re-think whether their existing products meet the demands of the end-customers. Financial institutions are making a conscious effort to shift from a product-centric to a customer-centric approach by involving the customers in the product development process.

Not limited by choice for the products modern banks offer, today’s discerning customers enjoy unprecedented market transparency levels and expect a frictionless customer experience. They are extremely sensitive when it comes to their needs and easily distinguish between a good or a bad user experience.

Changing Customer Behavior

Emerging and evolving digital technologies have been a catalyst for the open banking trend, spurring radical innovation in the banking ecosystem. Previously closed systems have evolved into networked and open systems, creating a conducive environment resulting in open banking’s flourishing. Technologies such as AI, machine learning, data analytics, and blockchain have empowered financial services providers to improve their product and service offerings at all levels, including front-office, mid-office, and back-office.

Advancements in Technology

Regulations have been instrumental in fostering innovation in the open banking ecosystem. The term “Open” is more of an explicit policy goal that has become elementary across the financial services industry. Open banking initiatives across the United Kingdom, including Payment Services Directive 2 (PSD2) and Open Banking Working Group (OBWG), are prime examples of the trend’s rising significance.

Regulations Fostering Innovation


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09

WHITEPAPER | Decoding Future of Insurance

APIs might not be new, but they are now being deployed by the financial sector to reinvent how the information is shared. APIs have evolved into a core component for enhancing existing products and fostering new value-creating product innovation. In the new paradigm, APIs have become more user-friendly components by bridging legacy enterprise silos.

Open banking is an accelerating trend that allows a bank’s customers to interact with their bank outside the traditional banking product and service environment, enabling greater access to customer data and payment infrastructures. Although financial institutions and payments services providers are increasingly leveraging APIs to broaden and enhance their services by increasing automation and strengthening security, it is virtually impossible to reap APIs’ full benefits without standardization.

Until now, banks have been using disparate nomenclatures for standard terms and deploying customized formats to share information. Whenever a developer creates or updates an app, modifications must interact with each bank without standardization.

Standardization of APIs enables the developers to build apps that seamlessly interact with numerous banks without modifications. Standardization helps streamline and simplify implementation across organizations, leading towards a lower total cost of ownership (TCO) and greater efficiencies across the ecosystem.

With standardization, development, deployment, and integration into existing systems become easier. Achieving API standardization is a critical component to ensure compatibility, consistency, interoperability, and sustainability, as having different versions of APIs for standard service is inefficient.

Governance is foundational to standardization. This helps to ensure that a practical framework and process is in place to safeguard and support the development, testing, and implementation of standardization, including definition, maintenance, and certification.

GROWING ROLE OF APIS IN BANKING AND THE NEED FOR STANDARDIZATION


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Standardization helps banks communicate in a frictionless manner while verifying account information before processing a transaction, thereby mitigating risks and limit losses.

Benefits of API StandardizationFinancial institutions and banks can realize the following benefits by embracing API standardization:

Reduction in Fraud and Risk Mitigation

Following a standardized approach and leveraging technology as a differentiator for business helps to simplify and improve customer experiences while ensuring security and reliability.

Leveraging Technology as a Differentiator

API standardization helps financial institutions innovate and create new products and services to deliver more customer-centric solutions, such as advanced information reporting and analytics.

Innovation in Products and Services

In the financial services landscape, customers’ expectations are continually evolving. Standardized APIs can help banks shape customer experiences by delivering value-added services and foster loyalty.

Meet Evolving Customer Demands

The developers can quickly implement new capabilities with a standardized API design approach. APIs provide a framework for supporting faster payment options such as Same Day ACH.

Faster Implementation

Interoperability within the payments system allows multiple platforms, infrastructures, and products to interact seamlessly, facilitating quicker, more efficient, and transparent transactions across disparate systems.

Greater Interoperability

A standardized API suite allows developers to build and deploy functionalities such as trace requests and to acquire payment status. APIs empower the banks to shorten the overall project development lifecycle and achieve faster time-to-market.

Simplified Development, Implementation, and Integration


11

The API use cases making an insurmountable impact on the payments ecosystem across the financial services industry fall into three categories:

API USE CASES IN BANKING

APIs facilitate Human-to-Machine (IoT) connectivity for payment processing, leveraging wearables, ATMs, vending machines, etc.

APIs help speed up enrollments for Automated Clearing House (ACH) origination and lower financial institutions’ costs.

APIs support interoperability and help define payment processing standards and routing determination between the payees and payers through different networks.

APIs enable real-time messaging between the sender, receiver, or processor to accept payment instructions in real-time and process with ACH batch settlement.

APIs provide the status of the transaction via real-time messaging to the originator of the payment.

Payment Access


APIs provide the ability to retrieve account balances in a standardized format, with secure data access and messaging for permission-based transactions.

APIs enable aggregation of information for informed credit-related decision-making.

APIs provide the ability to retrieve account history in a standardized format, with secure data access and messaging for permission-based transactions.

APIs work as a marketing tool by helping to gather customer data in a standard format.

APIs provide a single-sign-on solution for customers of financial institutions to connect to multiple applications.

Data Sharing

APIs help in account validation by ensuring that the target accounts are validated and payments are posted as desired.

APIs enable originating financial institutions to issue alerts quickly to receiving financial institutions of potential fraud.

APIs provide federal and state tax payment receiver account validation for improved safety of government disbursements.

APIs enable financial institutions to prevent fraud by providing information on closed accounts promptly.

APIs help financial institutions standardize the processes for tokenization in order to protect the customers’ sensitive information.

APIs provide a centralized model in a payment system to verify payees’ and payers’ identities, thereby reducing fraud.

Fraud & Risk Mitigation


12

CHALLENGES BANKS FACE IN ADOPTING OPEN BANKING

CONCLUSION: THE FUTURE BELONGS TO AN OPEN BANKING WORLDMost incumbent financial institutions and new market players have joined the open banking revolution, making it a part of holistic business transformation. A platform-based open banking ecosystem can help unlock greater ambitions and path-breaking business value.

Strategic choices shall govern how your organization will operate in tomorrow’s financial services world. APIs are increasingly becoming the building blocks and gateways for innovation.

Kellton Tech is a ‘Born Digital’ technology consulting and services company founded on the belief of ‘Infinite Possibilities with Technology.’ The company has helped startups to Fortune 500 clients build disruptive Digital Transformation solutions and leverage technology as a competitive differentiator for their businesses. Driven by deep domain knowledge and technology expertise, Kellton Tech adds value to client relationships by being as a Trusted Partner. A rapidly growing company, Kellton Tech has been placed four times on the Deloitte Technology Fast 50 India list and has been recognized by Forbes Asia as one among the Top 200 companies in 'Best under a Billion' 2017 List. With operations across the US, Europe, India, and Asia-Pacific, we are consistently on the lookout for the next competitive advan-tage. Please visit our website www.kelltontech.com.

North America: +1.844.469.8900Asia: +91.124.469.8900Europe: +353.76.604.2716

General Inquiries: [email protected]

Complex and redundant legacy systems.

Custom point-to-point integrations create complicated dependencies.

The absence of a vibrant developer community toassist in the development process creates hurdles.

Lack of access to tools for designing, monitoring, and testing.

The eruption of security issues as banks’ data, including the users’ personal information, is shared with FinTechs.


Open Banking v1

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