Open Banking transition explainedAccording to the definition provided by "Open Banking Europe", the term “Open Banking” generally refers to the way in which banks can make data and services available through interfaces (generally application programming interfaces or APIs) to authorized third-party providers ("TPPs"). In this way, client data are shared with authorized service providers in order to map their needs and preferences and provide them with tailor-made solutions and faster services.
An application programming interface, or API, is a set of programming code that queries data, analyses responses, and sends instructions between one software platform and another.
The Open Banking tendency was initiated with the Payment Services Directive 2 (2015/2366) ("PSD2"), which was proposed by the European Commission in July 2013 and became applicable on 13 January 2018. PSD1 and PSD2 are the basis for the banking of the future.
Why do banks become "open" ?Open Banking offers to the banks the possibility to understand better their clients and their needs: retail clients, SMEs, and Corporates. Open banking brings innovation in the way banks appreciate their clients and can offer them better services and products. The enhanced competition created among banks and technology-based financial service providers ("FinTechs") has as a result better and cheaper payment services for the customers.
In this context, we should also stress how open banking makes customers' banking experience more comfortable as there is no more need to change from one bank account to another. All the accounts of a customer can be gathered and used in one single platform. In this way, the client not only saves time but also has a better picture of its financial status and makes better-informed decisions.
The advantage of an open banking environment is that it is regulated, in Europe by PSD2 and the data transit under a secure encrypted banking environment.
However, it does not mean that open banking is risk-free. With Open Banking, the banks are required to offer third-party providers access to accounts via APIs, after the client's consent. This means that banks will have to persuade their customers that they efficiently comply with PSD2 and EU's General Data Protection Regulation ("GDPR"). Cybersecurity attacks are also a concern for data owners, and the open banking environment does not create confidence in the clients.
What's next?Open banking is on the rise in Europe, and the future will be the expansion of it more and more in the banking realm. On the one hand, banks will face challenges that they will have to overcome. Banks will have to understand the functionality and usefulness of open banking and educate their agents. Moreover, as banks will compete with FinTechs, they will have to advance their technical standards and adopt the latest trends.
On the other hand, the Open Banking era will bring opportunities that will change the future of the sector. Banks will evolve from traditional, old-fashioned institutions to modern innovative hubs, and finally, banks and customers will get connected beyond the sterile way that communication was until now.
On 26 July 2019, it was published a joint statement of the European Credit Sector Associations (ECSAs) and Third Party Provider associations on PSD2 rules, applicable on 14 September 2019. The European Commission greeted the initiative.
The financial system is built in a static way, investing in long-term relationships with customers. Open-banking is going to change the conventional way of interaction between customers and banks. The future is technologically driven, with fewer commitments to the banks, more players and everything online all the time.
Big technological companies like Google, Amazon, Facebook, Apple (GAFA) have already started playing the open banking game. In March 2019, Apple and Goldman Sachs announced that they are joining forces in order to launch a new card called "Apple card" for iPhones. The two giants will not share clients' data with partners and advertisers. This collaboration is one more sign that technology companies will increase their interest in banking services and will lead them to a new era.