‘Open Banking’ has been one of the most discussed financial terms of 2018, following sweeping changes by the European Union and moves by UK regulators. It is a phrase that is gathering attention from every pocket of the financial services, FinTech and broader banking industry. But what is it? Does it matter? And should the rest of the world take notice?
At its core, Open Banking is about data and, as its name suggests, opening up access to empower consumer choice and drive competition - ultimately allowing people to reclaim ownership of their personal information. Specifically, it affords consumers the ability to dictate how their personal data is managed and shared with other financial service providers.
In practice this means that a customer can decide whether their data, such as their spending habits, should be shared with platforms other than their primary bank - for example third party mobile apps. But equally, it could also be sharing information with a competitor or new rival digital start-up, and the primary bank has no choice but to comply. However, it is important to remember that this does not mean that data is shared with everyone, rather just with those that have been granted explicit permission by the individual.
The driving factor behind this fundamental shift has been the second Payment Services Directive (or PSD2, as it is more commonly known), which is a piece of European legislation designed to increase competition in the banking space.
But why the regulation? What are benefits?
The idea is to increase competition, allow users more control over their data and help to spur innovation in the FinTech and digital banking sector. For many years, traditional banks and other financial institutions have been the gatekeepers to a range of financial data, controlling who can view it, use it or even purchase it. Naturally, this has been an area that companies have been able to mine for cross-selling and marketing purposes for new services and products.
However, if a consumer chooses to allow their data to be shared with other organisations it opens a whole array of options for them, including more personalised financial products and potentially better deals. And along with it, comes fresh competition and disruption.
Consumers are now more selective about their products than ever before. They want options, tailor-made experiences and variety. Open Banking is a huge step towards providing this for them, but it also means that traditional banks must be agile and quick to offer these services.
But, alongside these benefits are heightened security risks that accompany the dissemination and sharing of personal and sensitive data. Open Banking should never mean it is open season for data theft and/or abuse. If anything, it should herald further data encryption and protection mechanisms adopted across the industry.
How does this relate to Open APIs?
Open API is the technology that underpins the ability for your data to be integrated into other products and services. This means that apps can offer you services that utilise information from your bank without any issues. The idea of open API is that it is publicly available to allow for seamless integration, meaning all you need to do is grant access to the data you want to be made available and it will fully integrate with a new product via information from your financial provider.
What dose this for digital banking, FinTech and the wider banking community?
Open Banking is opening the door for challenger banks and so-called “disruptors”. This is due to the availability of data that has been previously held by the large financial institutions. These new entrants to the market are helping to shape digital banking. One of the certainties of Open Banking is the rise of new FinTech start-ups that are bringing healthy competition and innovation to the financial sector. Some will certainly scale-up, while others will fail. But one thing they will all do is to create a more user-centric approach to digital banking and FinTech.
The legislation surrounding Open Banking shows the willingness of policymakers to use regulation to facilitate innovation. The perception of the lumbering, large incumbent banks that are slow to adopt new technologies is quickly fading as the race to stay technologically relevant in a fast-paced environment is underway.
What dose the future hold?
While no one holds a crystal ball, it is likely that the Open Banking regulation will result in similar adoption by financial regulators around the world. The result being financial institutions around the world pre-emptively racing to prepare for an Open Banking future. MUFG is one of those banks. We are committed to an innovative future and providing the best services for our customers.
MUFG envisages a future where Open API will enable seamless transactions, instant banking updates and detailed, tailormade financial advice offered instantly and updated continuously, while at the same time reducing international barriers and providing customers with an even easier international banking experience.
What this all means for consumers, however, is a plethora of options when it comes to financial apps and services, such as investment portfolios, savings platforms and transfer services. Imagine a future where your bank account is truly global, where you can transfer money anywhere, immediately and with no hassle, where your investment strategy is updated every day and your entire banking system is tailored to your every need. Customers will have more control and autonomy to get a better deal on financial products, for example a better mortgage, higher savings rate or a cheaper overdraft.
The Open Banking revolution could also lead to greater freedom for small and medium business to secure loans, with reduced red tape and more streamlined service, helping to increase efficiency and facilitate business growth at the grassroots level. Heralding a new era of economic prosperity.
Over the coming years, we are a likely to see a continued rise of the consumer-owned data culture and for it to become the international norm. While for some it may initially be a challenge to adapt to this new environment, in the long-run innovation and customer centric services will support the health and prosperity of the global financial industry.
Why Open Banking will go global