Open banking enablement should be a big part of any conversation in financial services, whether you’re listening to the latest banking podcast, attending a conference, or talking with your vendor about a renewal. However, in the absence of regulated open banking standards in the US, the term’s meaning can vary significantly depending on the speaker and audience. Everyone has their own definition. Those misinterpretations can slow your ability to innovate quickly, introduce unforeseen costs, and stifle your organization’s ability to scale. In this blog, we’d like to start an open conversation (see what we did there) about what open banking means to us and provide common questions and considerations that can help you identify and avoid the pitfalls around open banking.
Question: What does “open banking” mean?
The answer depends on which “open banking” you’re referring to. The industry typically gravitates to one of three primary implications of open banking (largely driven by geographical differences):
- PSD2 is the second Payments Services Directive adopted by the European Commission, enacted in 2018.
- Open Banking Standard is the UK’s implementation of PSD2.
- “Open banking” is more of a concept in the US representing the practice of allowing financial service providers (fintechs, third-party payment providers, etc.) to initiate payments or access a customer’s banking data through their financial institution’s API.
For the purposes of this conversation, we are referring to the open banking concept here in the US. Until the US enacts open banking standards, our industry struggles with the real benefits and risks that this banking movement presents. Financial institutions have always been (and will continue to be) concerned with security, compliance, and redundancy, but suddenly the industry is saying, “let’s do open banking?” Without a singular definition for what it means, that sounds scary!
At PortX, we generally subscribe to the definition above. However, we use more defined terms in our customer conversations to describe our viewpoint. Our technical team calls this data abstraction – moving a layer away from the banking core while maintaining the level of privacy, security, and compliance that customers and regulators demand. This partition is accomplished through the implementation of API layers and results in several key benefits, including (but not limited to):
- Unlocking access to core banking data without permission from the core vendor
- Owning and visualizing 360-degree customer data
- Accelerating innovation capacity for new products and services
- Easily connecting to fintechs through a standardized process
Question: My developers can do open APIs. Can we do it ourselves?
First, congratulations. If your CFI has a team of developers, you are in rare company! There aren’t many of you. We’ve had excellent experiences working with FI developers, but the secure networking, stability, and redundancy demanded by FI regulators make this a heavy lift. Start by considering the human resources required to build a tech stack like that of the PortX platform. Additionally, evaluate the implications of application support for such a complex infrastructure. Who do you call when something goes wrong, and how quickly will the issue be resolved?
Question: My core vendor is going to offer this. Should I just wait for them?
Finally! Core Vendors (I know the space well, having worked at one for over 17 years) need to catch up on developing a non-bespoke way to integrate with their systems. Open API availability is welcomed and will help CFIs compete better against the big banks. The question you should ask is, how long will this really take? If they’re telling you 12-24 months, will that turn into four years? How long can you wait to offer solutions that compete with the largest banks and fintechs clamoring over your customers? JP Morgan Chase reported that it would spend nearly half of its total IT budget – a cool $6 billion – on innovative digital products and services that will fuel the company’s growth and streamline operations.
Can you afford to wait one year?
Also, consider that all banking core vendors charge for access to their APIs. Will you incur a click charge every time your latest real-time digital banking app pings your core solution? Ensure that you understand the total cost of your vendor’s solution because it can add up quickly.
Going beyond the buzzword
We are just scratching the surface of the open banking conversation in this blog. At PortX, we leverage our knowledge and skills from decades of enterprise integration, API development, and connecting banking cores and other financial applications to build an open banking solution that minimizes hosting costs and deploys securely connected APIs. We are actively standardizing the deployment process to accelerate the implementation process for CFIs to partner with fintechs faster.
We’d love to hear your thoughts on open banking in general or specifically around some of the points presented here. Please drop us a comment in the section below. And, if you want to learn more about what we believe it truly takes to become an open banking-enabled CFI or how we are helping fintechs reach more customers faster, start a conversation with our team today.