Open Banking and its Impact on Traditional Banking

The banking and finance sector has started undergoing a lot of change since the start of the digital revolution and ‘Open Banking’ is one such disruption that is poised to change banking forever.

Open Banking is a mandate that requires banks to share certain account and transaction details with third parties through Application Programming Interfaces (APIs). The APIs allow software from different companies to have access to certain information from another. Open Banking also allows banks to quickly offer tailor-made products to their customers, particularly in the case of payment offerings.

In October 2015, the European Parliament brought about the Revised Payment Service Directive (PSD2) and with it, new types of banking services that use new ways of making payments. By August 2016, the UK Competition and Markets Authority (CMA) asked nine of the biggest banks in the region to share certain transactional data with third parties.

In India, open banking made way to the Unified Payments Interface (UPI). Several banks such as YES BANK, ICICI, RBL Bank, Kotak Bank, DCB Bank, and several others have adopted API based banking services to perform several processes like integrate with ERP systems in corporate banking, perform eKYC, verify PAN, display forex rates, and so much more.

Most of the open banking initiatives worldwide so far cater mostly to the B2C segments because it plays a big role in improving customer experience and bringing new products and services that are relevant in a digital age. However, providing similar offerings in the corporate banking space is an extremely lucrative space.  Since corporate banking relies on several systems to carry out their transactions, facilitating straight through processing would significantly improve transaction times. Finding a mean path where APIs run securely without any compromise of data will be the sweet spot for companies looking at serving the corporate banking segment. A lot of them are now using real-time data to offer more customer-oriented solutions such as viewing cash flows in real-time, online invoicing of customers, almost instantaneous reconciliation of bank accounts amongst others through platform-based ecosystems that interact with a bank on need basis.

Open banking is removing barriers between competitors and bringing about a collaborative environment that will eventually lead to better financial services. This has also led to the rise of FinTech in the recent years.

However, it should be noted that sharing financial data between different systems also mean that the parties having access to this information should be extremely cautious of data breaches. Getting user consent is becoming the norm in a lot of countries around the world and by giving users control over their financial data they can switch between service providers of their choice as and when they please. As a result, banks now need to function like the high tech companies of today where customer focus is top priority. This is the only way they will be able to engage their customers effectively and stay relevant in the digital age.