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Powering product innovation for banks through open banking

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Open Banking and Finance is still undervalued by established banks. A recent shift in attitude towards more financial inclusion and financial transparency increases the accessibility of services for the ‘underbanked’ and underserved across the globe. The key to unlocking financial inclusion and transparency is to open data so it is freely available to access. The financial services industry must leverage open data solutions to generate greater insights into a customer’s financial position.  

Open data plays a vital role in financial inclusion as people increase their social interest in things like greenhouse emissions and Environmental Social Governance (ESG). Banks and financial institutions will need to incorporate policies to demonstrate industry priorities to their business customers.  

Changes to the Payments Directive Service 2 (PDS2) legislation and Open banking provisions in the Consumer Financial Protection Act (CFPA) in the US means the privacy and sharing of financial data will be regulated. This is bound to influence the way institutions implement and deliver open data services. 

Shifts in societal preferences and in regulations have forced a greater propensity to share data and information between banks and their customers. In Europe and the United Kingdom, open data has enabled banking customers to gain access to a variety of products and services, especially benefits those who are underserved. This industry shift has started to occur across the United States and Asia-Pacific regions with recent changes to legislative provisions developed by the respective governments.  

With open technologies, banks can leverage consented business data to develop solutions to benefit both bank and business customers. Inclusion and transparency through Open Banking and Finance can reduce money laundering, exposure to underground economies and promote more personalized financial products to meet the needs of business customers.  

 

When developing platforms to better serve customers, banking institutions rely on Third-party providers with the capability to build and deploy open data platforms. These Fintech TPPs must offer solutions that incorporate all the essential elements of business functionality.  

Banks can consider what data sources and integrations are available, how enrichment of raw business data is transformed into valuable insights, and compliance and security measures to be mindful of during the design of the platform infrastructure. 


 

Considerations for decision makers: Connecting & integrating the right data sources 

Legacy institutions are slow to realize the tangible benefits Open Banking and Finance can offer.  

Among other consideration points such as API standardization, the implementation and scaling of banking platforms, and service-level agreements between the bank and third-party providers must be assessed when building open data platforms. 

The use case for open platforms is ever-growing. While the concept is not new, adopting and understanding the idea of Open Banking and Finance will continue to scale in the next few years.  

1. Achieving transparency and inclusion  

Financial institutions will need to consider how they aggregate and enrich business data.  

  • Business customers want and need information and knowledge to be presented in the most beneficial way to improve their business performance.  
  • Reducing friction in customer experience offering more lending opportunities to businesses by partnering with third-party fintech providers, like 9Spokes.  
  • Adhering to internal risk appetite and industry compliance measures to maintain credibility and trust while increasing lending capability. 

2.  Integration of data points 

Digital-first businesses use more than 10 apps to manage their daily operations. Integrations most crucial to a small business are banking, accounting, eCommerce, payments, and inventory management.  

Small businesses seek tools and advice from their trusted banking institution suggesting that banks need to better engage their business customers. Integrating data points providing the best and most essential app and bank coverage will enable more cohesive experiences for both the bank and business customer.  

Banks need to consider open platform providers that articulate: 

  • the number of integrations and data sources they can provide at onboarding. 
  • the percentage of banks and bank accounts they cover in each market. 
  • the security accreditations they hold. 
  • an end-to-end Implementation plan and onboarding of clients outlined and includes API documentation, technical implementation review, and delivery and deployment timelines. 

3. API standardization 

Lack of standardization causes friction in the development process as different companies use different code languages. Third-party providers can provide Software Development Kits (SDKs) comprising of technical elements needed in the development process. This informs decisions around the product and feature functionality for open finance solutions and the hygiene that goes around accessing raw data and enriching data for insights. 


 

Considerations for decision makers: Delivering compliant and secure open platforms   

With cybersecurity attacks rising by 65% in the last year, how data is processed, transferred, and stored is vital to understand when seeking a potential provider. 

Business data powers open banking solutions with multi-tiered infrastructure. This means banking institutions and the providers they work with must follow industry best practices and have processes ready in case of threats and breaches.  

 

Compliance – Regulatory changes impacting open banking and finance 

1. Payments Services Directive 3 (PSD3) for EU/UK 

In Europe and the United Kingdom, Payments Services Directive 3 (PSD3) is the next evolution of the PSD standard for payment initiation and open banking.  

PSD3 will address:  

  • Strong Customer Authentication (SCA) which requires payment gateways to enforce multi-factor authentication when using credit or debit cards. 
  • an amendment to open banking standards and protocols, simplifying the transaction process and increasing user confidence. 
  • the sharing of customer information between compliant authorities and banks. 
  • potential facilitation of cross-border payments, increasing choice and diversification. 
  • payment fraud ensuring high-level consumer protection  

PSD3 will aim to regulate the sharing of data by enabling additional financial service areas, such as borrowing, investing and financial planning. 

2. Consumer Financial Protection Act (CFPA) Section 1033 for US  

In the United States, Consumer Financial Protection Act (CFPA) Section 1033 will be launched by the Consumer Financial Protection Bureau to encourage “decentralized and neutral consumer financial market structure [that] has the potential to reshape how companies compete in the sphere.”.  

By 2024, the US will have open banking provisions to: 

  • accelerate innovation of products and services. 
  • increase competition to drive quality and rates within the financial services industry. 
  • regulates the privacy and sharing of financial data by incumbent banks. 

 

Security – validating trust and reducing compromised systems 

Financial institutions should consider open platform providers that are ISO 27001-certified and complete rigorous penetration testing by independent auditors and banks. Other security measures to consider include: 

  • monitoring security and planning for Incident Response (IR). 
  • identifying and protecting endpoints with firewalls and industry standard approaches. 
  • protecting against code-level vulnerabilities such as cross-site scripting and structured query language (SQL) injection. 
  • Model potential threats / test threats and set out procedures to mitigate future vulnerabilities. 

 

Maximizing the full potential of open banking

Banks and fintechs need to collaborate to accelerate open banking and finance innovations alongside digital transformation.  

Core banking platforms already consolidate banking transactions and historic payments and accounts in one place. But platforms could integrate open banking among accounting, cash flow management, risk management, and other functions together.  

New financial technologies create the opportunity for existing banks to compete with neobanks and digital-first lenders. Open Banking is growing quickly, allowing for banks to provide better business banking experiences with consented customer data.  

Banks and FIs (Financial Institutions) can better engage small businesses using open platforms to deliver valuable insights. By connecting business apps and financial data, banks can deliver intelligence through data aggregation to one place. It puts small business owners in control and allows them to benefit from their financial data to tackle critical business tasks.  

Open data allows SMBs to access more competitive rates, digital tools and the ability to switch lenders at the click of a button. Banking institutions are developing new mobile applications, offering more attractive investment options, and upgrading their services to digital platforms. 

Banks that succeed in digital transformation benefit from improved customer engagement and satisfaction. 

 


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