- 10th July, 2018
Open Banking: Disruptive data-driven opportunities
By Phil Massie
From the perspective of financial institutions, your data, transactional and otherwise, represent rich, private repositories. These repositories are used in many spheres including better customer experience, improved bottom lines and fraud detection.
Most of us rely heavily on our financial institutions to closely guard our account and transactional data. After all, our transactional profile paints a detailed picture of our lifestyle and could be used to facilitate identity theft, commit fraud or worse. Unfortunately, the locked-down nature of these data tend to restrict us to the products and services offered by our institution. So if your neighbour’s bank offers a much better app with value adding transaction classification tools but yours doesn’t, you’re pretty much stuck.
In Europe, this traditional siloed approach to financial data is getting turned on its head. In January 2018, the Revised Payment Services Directive (PSD2) came into effect in the European Union requiring all banks to expose their back-end data via application programming interface (API) layers. What this means is that both banking and non-banking organisations can write software which interfaces with the financial data of clients who opt in, regardless of their choice of institution. This gives customers the opportunity to mix and match financial service providers, leveraging the products that suit them best far more easily.
Fintech firms across Europe are set to leverage these products and data layers in new and exciting ways such as providing cross institution financial management and marketplace tools and improving credit risk prediction using AI. Payments for example, now have the potential to be handled seamlessly from within any application. You could lend or send a friend money right from your usual messaging app.
The full scope of what this change will mean for traditional banks is a little unclear but it certainly increases the pressure to offer competitive products and services. For instance, do you suppose that your bank could compete in a KYC match-up with the likes of Google or Facebook? My bank certainly couldn’t.
Some EU institutions have already upped their game, embracing the paradigm by rolling out the API layer ahead of time. Last year HSBC released an early beta version of their banking app allowing their customers to interact with their entire institution-agnostic financial portfolio. Embracing Open Banking seems like a wise move and not only because of its inevitability. The additional insights a bank can gain from having a more rounded view of their customers’ financial behaviours should translate to better banking experiences for all.
The Open Banking paradigm is not restricted to the EU. Britain is rolling out similar legislation and the approach is likely to be implemented more-or-less globally. The South African banking sector also has a reputation for innovation with some of its institutions already exposing APIs to fintech companies.
There is no doubt that tailoring your banking needs through a suite of specialised apps should lower costs and maximise value. Moreover, the approach could allow institutions to better address financial inclusion and extend opportunities to more entrepreneurs.
It would appear that a proactive approach by African banks would culminate in bigger benefits for themselves, their clients and their economies. The key question is whether our banks will seize this unique opportunity for change.