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On 05.11.2020 we tuned in into the Open Banking Summit held by the Commerzbank in cooperation with the Business Engineering Institute St. Gallen. We will have a look into the Summits key notes to see how the realisation of Open Banking is progressing based on this use case – which opportunities may arise and which challenges are still to face.
Open Banking became more prominent in 2016 when the United Kingdom announced its Open Banking Standard and the European Union published its Revised Payment Services Directive (PSD2). However, it only gained momentum in 2018 when these drafted legislations came into effect. Simplified these laws require banks to open up their IT infrastructure. Technological this is done through application programming interfaces (APIs) which allow different IT infrastructures to communicate with each other. In the case of Open Banking, APIs enable third parties to connect to banks existing IT infrastructure and thereby access and usage of the data gathered– say bye to data silos guarded by banks.
The backbone of the Summit was a whitepaper The Future of Collaboration in Corporate Banking in which Joerg Hessenmueller (Commerzbank AG) defined
“API [as] a crucial technology that enables communication between IT-systems with enough flexibility to address the complexity of today’s world [based on] closer collaboration among different parties leveraging on their different capabilities to create value for the customer”.
Resulting from that one can draw the conclusion of David Kauer (PostFiannce AG) that
“Open Banking is a fundamental strategic and architectural question. Banks do not just do Open Banking – Open Banking is a framework that requires a 360-degree view of business and corporate clients and their needs. Banks, thus, have to decide wisely about the order of actions they take to follow such an approach.”
So what is achieved so far?
As the use case of Commerzbank depicts cooperation is key to identify and leverage the options available. Slowly, new networks are emerging. First attempts of opening up are made. So far these are still in their infancy. An example is the developer portal. This sandbox provides developers the documentation and option to play around and get used to the APIs provided by the Commerzbank. When having a look at the opportunities and challenges it is, however, clear that this is only a small first step in the right direction.
What are the outstanding opportunities?
The approach envisioned by the PSD2 is to fundamentally change banking in the European Union. Its implementation is aimed to enhance the value proposition of financial organisations. The basic framework is set to achieve a higher degree of cooperation and co-innovation between banks and third parties for example FinTechs. This is highly dependent on the abilities of banks to think beyond their organisational borders. If this outward-opening is happening the most valuable opportunity can be realised:
Building a new digital ecosystem marked by new business models and driven by customer expectations.
Technological enabled would such an ecosystem be through the opening of banks APIs. Cooperation, innovative ideas could facilitate user value by enhancing consumer protection and security of internet payments as well as account access within the EU and EEA. Accordingly, the opportunity for customers is access to enhanced services within one digital ecosystem. Such services would greatly enhance banks attractiveness by increasing their value proposition. At the same time, FinTechs have the opportunity to grow by getting access to a greater market reach or even provide the B2C of banking. Another actor in such an ecosystem would be BigTechs which, according to David Kauer, could take a role as technological orchestrators. In that case banks would probably occupy the B2B in such an B2B2C banking ecosystem. To not be pressured into the role of an anonymous backoffice service provider banks have to seek an pro-active role. So in general Open Banking should not be understood as a threat or zero sum game by banks but instead as an opportunity. In that sense all actors would profit in the banking B2B2C ecosystem.
Which challenges is the industry still facing?
However, the transformation is still facing challenges that need to be tackled for a digital ecosystem to emerge. As the banking sector will open up for everyone offering financial services a mind-set of collaboration is of importance. Customer centricity should be the focus flanked by provisioning of the necessary infrastructure –for example in innovation labs. An optimal setup is completed by a bank’s readiness to identify partnerships and then leverage resources to seize the presented opportunities.
Technological there are still some hurdles that hinder the facilitation of a collaborative approach to adapt to structural change. Technological readiness is one challenge to face. The adaptation of key technologies across the industry differs strongly and may, in the current state, make collaboration more difficult. Tightly connected to this is the missing standardization of APIs. Heterogeneous architectures for the same services are making a fast and approachable cooperation across organisations fairly difficult.
Future will show of all potential actors can overcome these challenges and thus provide the necessary prerequisites to foster an ecosystem marked by innovative ideas combined with industry-specific know-how
– Jonas Geisen, ESR