A joint statement was released on March 25, 2022, by Payment Systems Regulator (PSR), Financial Conduct Authority (FCA), CMA, and HM Treasury, announcing their collaboration on the future vision & governance of open banking and the formation of a Joint Regulatory Oversight Committee (the Committee). Further, on December 16, 2022, the committee discussed the update on the progress, the vision and innovative ideas for how the future entity should function.
This is expected to bring major changes and reforms in Open Banking, enhancing development across various spheres. Open banking has increased the UK’s international competitiveness and leadership and has also benefitted customers, businesses, and the broader economy, promoting economic growth.
Let us elucidate on what would be the impact of these statements, and how Tavas, a new-gen, platform is fuelling the development of open banking, and leveraging the future of the FinTech Industry.
The impact of the Joint Statement
Three priorities identified are to unlock the potential of Open Banking payments to support competition and innovation, and to adopt a scalable model for future data-sharing propositions. Further, the focus is also on establishing a sustainable foundation for the ongoing development of the Open Banking ecosystem.
The Strategic Working Group (SWG), convened by the Joint Regulatory Oversight Committee (JROC) and independently chaired by Bryan Zhang, is providing a comprehensive analysis that reflects the variety of stakeholder perspectives on Open Banking’s current gaps, potential short- and long-term solutions, and the structures required to further develop Open Banking and define a future roadmap. The final report of the SWG, which will be given to the Joint Regulatory Oversight Committee by January 2023, will be a crucial factor in JROC’s deliberations.
In the interim, we anticipate the future entity to begin delivering priority non-Order activities, with cooperation from regulators, as necessary. The transitional state will terminate when a permanent regulatory framework is in place. The framework will be supported by all applicable legislation.
The blueprint of the future entity includes
The Joint Regulatory Oversight Committee has a key vision for the future:
- Empower Open Banking products and services. Drive competition in financial services that benefit both consumers and businesses
- Strong technical infrastructure and services enhancing new standards
- Ensuring cohesive collaboration with partners like Pay.UK concerning Faster Payments Scheme rules.
There are three essential components that the work addresses
- To enable Open Banking to thrive, a long-term regulatory framework needs to be established and will include the relevant regulator
with powers of review, variation, or withdrawal (subject to CMA judgement).
- The CMA Order is in effect before permanent regulations are set up an interim state will exist.
- To ensure usability across all users of services and capabilities, it is important that financing for this future entity comprises broad-based equitable funding which efficiently distributes costs proportionally
- In the interim state, various principles implied on non-order activities, encompassing new activities, services or infrastructure would be discussed.
- The purpose of the entity, including playing a significant role in the development and growth of Open Banking, should be reflected in its governance arrangements.
- Any fees/liability arrangements should also take into consideration these same factors.
Interaction with further open banking operations
Joint Regulatory Oversight Committee’s work and transition planning to assess any legislation required to underpin the long-term regulatory framework for Open Banking will ensure the objectives are met.
- CMA will announce the completion of the present road map.
- In the first quarter of 2023, the Committee will make public its suggestions
About the design of the new institution, both during the interim stage and once a long-term regulatory framework is in place, as well as its vision for Open Banking.
The Committee will continue to coordinate to ensure all activities align to achieve the vision set.
MG's View on the Joint statement
The joint statement, focussing on emerging thinking, which encompasses the design of a future Open Banking entity has been revealed lately. This joint statement has added additional focus to ensure that the operation reaches more people effectively, along with a technical roadmap envisioning a broader schema of design, implementation, effectiveness, and operations of open banking. The SWG’s extensive analysis would reflect the range of stakeholder views it has gathered during a series of “strategy sprints” in recent months. Also, a further statement is yet to be released in the first quarter of 2023. This will open the views, and recommendations with futuristic insights.
In the series of Sprint Strategy, the committee consists of a range of industry representatives, subject matter experts’ consumers, businesspeople, and other prominent stakeholders who have given their views addressing the current gaps, short-and long-term solutions, along with the structures required to further develop Open Banking and define a future roadmap. According to the latest announcement, two expert panels from the SWG’s team will be set up to lead the payments strategy sprint and the data strategy sprint. The duration of each sprint would be for three weeks, starting with a one-hour “kick-off” session and followed by a two-hour sprint discussion agenda. We expect that JROC would prioritise existing issues rather than getting narrow with topics regarding ESG amongst other considerations during this period.
The advent of this joint statement is to promote the prominence of quick, efficient, and convenient data transmission methods to the third-party banking service provider, enhancing greater competition and innovation that would benefit consumers, businesses, and the wider economy. As a result, a boom in boosting the economy of the UK and fostering international leadership in this field can be achieved swiftly. This fuels the unlocking of Open Banking payments to enhance a plethora of newer options for payments, and tailored services that would reinvent a plethora of possibilities, and bring more prospects into open banking that would help invoke newer opportunities.
In addition to unlocking Open Banking payments, HM Treasury, the FCA, PSR, and CMA are focused on “Adopting a model that is scalable for future data sharing propositions”, and “Establishing a sustainable footing for the ongoing development of the Open Banking ecosystem.”
Increased impetus toward open banking – What Financial Institutions should do?
There are almost five million active users in UK. The trajectory had gained momentum in the last five years. According to the Statista Research Department, Europe has almost 12.2 million, open banking users, and is expected to reach 63.8 million by 2024. As of 2020, 24.7 million individuals worldwide used open banking services, a number that is forecast to reach 132.2 million by 2024. It is important to note that, the growth reached a great momentum between 2020 to 2024, at an almost 50% increase.
When much of the emphasis is on the security of all the transactions, where most of the data are exposed to several vulnerabilities, it is highly mandatory to enable comprehensive protection. Various financial regulatory boards and organisations are constantly working towards bringing holistic effectiveness to increase operability, facilitate ease of transactions, offer seamless operations, and strengthen the open-banking system.
The backbone of the Open Banking system lies in the modern platforms that offer a plethora of options including robust dataflow, advanced API, and adherence to strict compliance and regulations. With advanced options to choose between cloud-based architecture or an on-premises, it opens newer choices for the clients to choose efficiency and cost-effectiveness compared to the traditional methods of banking.
How Tavas will help achieve the vision?
As a comprehensive Open Banking product suite, TAVAS focuses on creating a consumer-centric digital payment transformation, encompassing advanced features with great security. Adhering to strict compliances, and regulations to achieve interoperability and stay in control of the endlessly changing payments ecosystem. TAVAS supports a robust data flow serving the Open Banking security conformance and accelerating an array of features for secure deployment of open APIs compliant with OBIE API Specifications. Along with that, it has an integrated developer portal and Open API sandbox that helps third-party providers to build and develop Open Banking APIs. Feature-rich platform with vital Data-quality controls and integrity checks offers resilience and complete end-to-end open banking solutions
As being highly inter-operable, and efficient to handle massive accounts of transactions along with a high volume of payment requests ensuring the integrity and validity of every transaction has made TAVAS, the most reliable solution.
Encompassing all the features required to build a comprehensive platform, Tavas has become a boon for banks, to expand and enhance customer satisfaction, and bring futuristic advancement proactively. To partner with us, call us at +44 (0)204 574 2433 or mail us at email@example.com. Our executives will stay connected with you to understand your requirements.
Open Banking becomes an older topic for now as Europe has been talking about it for the past two years. Open Finance is currently a hot topic in the financial industry, but what exactly is Open Finance?
“Open Finance” refers to any Open Banking activity that extends beyond the regulatory scope of PSD2’s Access to Account provisions. As a result, data sharing and payment initiation via APIs that extend further into payment accounts, payment services, and payment service providers defined by PSD2 (Payment Service Directive 2) come under the scope of Open Finance.
Regulatory interventions set up the groundwork for Open Banking. Because of this, the Open Banking market is evolving, and new products and services are being introduced as customer adoption of these new payment methods are increasing. Open Banking facilitates the sharing access of customer financial data more securely to make life easier. The Open Banking capabilities developed by firms ranging from incumbent to challenger banks and FinTech firms have proven to be effective in delivering consumer and market utility. The distributed technology has laid the groundwork for Open Finance to expand for even greater customer benefit.
Open finance extends beyond the data and services provided by the banks to encompass customers’ entire financial footprint. A trusted third party could access financial data related to pensions, taxes, and insurance with consent from the customers. This paves the way for more tailored consumer services, including payments and other financial products.
Third-party providers can use open application programming interfaces (APIs) to build applications and services that add value to consumers, by providing exclusive data-driven insights, streamlining the user experience, or simplifying payments.
How Open Finance differs from Open Banking?
Till now, the distinctions between Open Banking and Open Finance are not clear. However, we can identify some differences based on what is happening around the world, whether through regulatory actions or market-driven initiatives:
- API Providers (ASPSPs): In Open Banking, banks and other financial institutions are considered as the API providers. In Open Finance, other account holders such as insurance companies, pension funds, and wealth managers, can provide Open Finance APIs.
- API Clients (TPPs): Open Finance APIs can address a variety of ‘clients,’ including TPPs regulated by a National Competent Authority (NCA) under PSD2 and organisations that are not regulated by an NCA.
- Security: NCA-issued authorisation numbers, PSD2 eIDAS certificates, and/or scheme lists may or may not be used for Open Finance client identification.
- Contracts: Commercial contracts between the API Provider and the API Client may be needed for Open Finance APIs.
The Regulatory Framework for Open Finance
The European Commission issued some correspondence on the EU (European Union) Retail Payments Strategy in September 2020. It established several objectives for the EU’s Digital Finance Strategy. One of them was to promote data-driven innovation, specifically improved data access and data sharing within the financial sector. The Commission also acknowledges the need for an Open Finance Framework by 2024 and plans to propose one in mid-2022.
There is a contradiction in defining Open Finance as the non-regulated, value-added space because services introduced today as Open Finance will no longer be Open Finance if they are regulated later. That could be a problem at some point of time.
Open Finance access is allowed, provided that only the data owner or a third party authorised by the owner has access to the data. Furthermore, due to the risks and sensitivity of financial data, there must be certain level of control over data access, which can be carried out through customer consent, contractual agreements, qualified certificates, or other means. Open Finance is an ethical process because it is transparent and effective for all parties involved.
Account Servicing Payment Services Providers (ASPSPs or banks) and Third-Party Providers (TPPs) or regulated entities are not the only ones who can take part in Open Finance. It applies to financial institutions (e.g., banks, financing companies, insurance companies), as well as merchants, utility companies, corporates, Small and Medium-sized Enterprises (SMEs), and individuals.
Advantages of Open Finance
Regulators and industry stakeholders acknowledge the importance of Open Finance and outline some of its expected benefits:
- Improves user experience by supplying customised products and services.
- Enables wiser financial decisions and improved financial management.
- Improves efficiency and productivity for big corporates and small and medium-sized businesses.
- Increase competition among financial service providers, fostering innovation, new service development, and increased demand.
What is the future of Open Finance?
Open Finance is the logical next step in applying the Open Banking concept to a much broader range of financial products and services, including insurance, pensions and even in other domains such as healthcare and more. The opportunity to improve savers’ overall financial well-being is enormous. However, much work is still to be done to get it off the ground, beginning with regulations, standardisation of the technology, and the development of new use cases to show the benefits it can provide.
We are excited to see what the future holds for Open Finance in general, as well as the innovations it may bring to the pensions industry to improve consumers’ insights, decision-making, and financial well-being.
From Open Banking to Open Finance and then to Open Data – New gateways
Open Finance is not the end, it is the beginning of financial industry evolution. It brings us closer to Open Data and a data-driven world in which all the industrial ecosystems are interconnected.
As a result, industries must embrace and incorporate Open Finance into their culture. Open Finance is pushing the industries into new innovative water, and those who swim in it will be better positioned to succeed in the upcoming Open Data reality.
Open Data services facilitate the customers to access and share their financial data with the approved third-party providers (TPPs), fostering the innovation of ground-breaking products and services that aid customers in better engaging with their finances, making empowered decisions, and accessing tailored products and services. Open Data is being utilised in the Account verification process, Credit checks and other PFM platforms.
- Improved financial decision-making.
- Increased access to advice and guidance.
- Better borrowing decisions.
- Enhanced user experiences.
- Increased financial awareness.
What are the potential implications of Open Finance?
This would be the debating question in the market currently. Open Finance could reduce costs and increase benefits for customers. A low barrier to entry, achieved through the low-cost reuse of existing capabilities, will secure the ability to bring solutions to market for consumers more quickly.
Open Finance has the potential to reduce fraud, improve financial well-being, expand credit availability, supply more payment options, and enable reusable digital identities. Each of these outcomes stands for a significant undertaking.
The challenge for future work is to identify the priorities where success is more likely to describe collaborative action from the industry players, government, customers, and regulatory bodies. It enables open access to data to identify the possibilities and opportunities around open finance and to set a mandate on what could be done.
By focusing on customer outcomes, we are also in the best position to directly address the issues that most trouble individuals and businesses, and which Open Finance has the potential to resolve.
The industry is already moving forward with several initiatives aimed at achieving the results as part of the evolution of open finance. The emphasis will be on integrating and putting into practice the various initiatives, such as enhanced fraud data sharing initiatives and access to all the available data sources. In other areas, business is showing thought leadership on how Open Finance could encourage entrepreneurial behaviour, for instance, by removing obstacles to the formation and operation of SMEs.
Open Banking has been driving a spectacular impact on the financial world since January 2018, disrupting everything from payment solutions and budgeting tools to lending applications and credit analyses.
But what exactly do Open Banking providers do? Regulated providers construct and maintain the digital pipes that enable banks to securely request data and payments.
Open Banking is currently being used by individuals, lenders, and financial institutions to substitute the legacy manual and increasingly complex processes. The ability to collect and view insights derived directly from bank transaction data in real-time is extremely powerful, but it can be overwhelming for businesses that have never worked with this data before. Understanding how the technology works and what technology companies are doing with it can help you come up with new uses for it.
Open Banking relies on third-party providers (TPPs) who can provide two core Open Banking services through two separate FCA authorizations:
- Account Information Service Provider (AISP): a person who is authorised to retrieve account information from banks and financial institutions.
- Payment Initiation Service Provider (PISP): a person or entity who is authorised to initiate payments into or out of a user’s account.
Companies that want to be regulated as an AISP or PISP must go through a rigorous application process with the FCA. Some Open Banking providers can be regulated as both an AISP and a PISP, but many only have one.
AISPs and PISPs manage client consent required for Open Banking data access. This implies that each AISP and PISP explicitly state to the end-user what data will be handled, for how long, and with whom it will be shared. This digital consent journey also serves as the foundation for GDPR information processing for AISPs and PISPs.
Account Information Service Providers (AISPs) explained
An AISP is a company that has been granted permission to access an individual’s or SME’s financial institution account data. The UK’s nine largest banks are required by law to comply with the AISPs’ requests. The framework and technical specifications of Open Banking allow for the retrieval of years of transaction history in seconds.What are AISPs capable of?
Being an authorised AISP means that a company can request permission to connect to a bank account and use the information from that bank account to provide a service.
Some AISPs do not have permission to access the bank account information as they are granted “read-only” permission. They can look but not touch, which means they can’t move a customer’s money.
AISP-related services and tools include price comparison, money management tools, faster and more accurate access to financial products, and speeding up manual processes such as applying for a mortgage or a loan, among others.
Examples of AISP applications include:
- Money management tools: some AISPs collect financial data and disseminate it in a way that allows people to easily understand their financial situation, create a budget, and track spending. These new personal finance tools combine data from multiple bank accounts so that users can see their entire spending history in one place.
- Loan applications: Some AISPs, such as Credit Kudos, use this same capability to allow customers to share financial information securely and quickly with a lender or broker. Lenders also use account information-derived data and metrics to improve credit and affordability decisions. This procedure expedites traditional underwriting by eliminating the need for lenders to manually compile and verify bank statements. Better insights benefit the lenders and can provide a better customer experience to the borrower.
Payment Initiation Service Providers (PISPs) explained
PISPs are authorised to make payments on behalf of customers rather than just viewing account data. PISPs accomplish this by initiating direct transfers to or from the payer’s bank account using the bank’s tools.What are PISPs capable of?
Businesses that are authorised PISPs may request permission to connect to a bank account and initiate payments from the customer’s bank account.
There are a variety of reasons why you might want a business to initiate payments for you. For example, an app that helps you handle money in your multiple savings and current accounts to ensure you never go overdrawn and don’t have to pay potentially substantial overdraft fees. This type of capability is possible in retail, where you allow a company that you shop with frequently online to connect to your bank, so you get fast checkout and don’t have to re-enter card details for every transfer of funds.Examples of PISP applications include:
- Financial management tools: A few new money management and savings apps transfer a small proportion of someone’s balance each week to a savings account according to a predetermined process. Open Banking has also facilitated new tools that automatically transfer money between accounts on behalf of customers to avoid overdraft fees.
- Business solutions: New tools integrate with back-office systems, allowing businesses to securely manage payments and collections, make real-time bank transfers, and gain greater payment visibility.
Account Servicing Payment Service Providers (ASPSP) explained
Account Servicing Payment Service Providers provide and manage payment accounts for payment service users (PSUs). ASPSPs have typically been banks and similar financial institutions including building societies, and payment companies.
The number of banks and building societies providing open banking services is increasing. Only the UK’s nine largest banks and building societies are required to make your data available through open banking now. Smaller banks and building societies also can participate in open banking.
ASPSPs release Read/Write APIs as part of Open Banking. These allow consumers to share their account transaction data with third-party providers, who can then initiate payments on their behalf. PSD2 requires all ASPSPs in Europe to participate in open banking and provide data access.
How do open banking and screen scraping compare?
Screen scraping (also known as credential sharing) is an old technique for gaining access to a customer’s bank account to retrieve transaction data. Screen scraping works as stated below:
The customer provides their login information to a third-party provider (TPP). The TPP uses these details to log in to the customer’s bank account. The TPP then copies or “scrapes” the customer’s bank data for use outside of the customer’s banking app.
Before open banking, the only way for apps to access customers’ bank accounts was through screen scraping. Online accounting software packages made extensive use of it. Open banking, on the other hand, is a more secure method because it does not require the customer’s credentials and is thus much more secure.
Electronic signatures can have the same legal validity as handwritten signatures under a 2016 EU regulation. However, such signatures must meet the requirements of eIDAS (electronic Identification, Authentication, and Trust Services). eIDAS certificates enable ASPSPs such as banks in European open banking to identify and authorise API connections from Third Party Providers such as PISPs and AISPs. This is critical in preventing unauthorised access to bank accounts. Since Brexit, only UK-authorized Third-Party Providers can use eIDAS certificates.
Open Banking API providers and their requirements
There is no ‘official’ API for Open Banking. Instead, banks and Technical Service Providers provide their APIs that must adhere to the Open Banking Standard specifications released by Open Banking Implementation Entity (OBIE) which is an official organisation that supervises the Open Banking implementation in the UK. The Open Data API Specification governs how banks develop access endpoints for Third Party Providers (TPPs). It defines how TPPs can use a bank’s Read/Write API. You can find the list of Open banking API specifications on the OBIE website.
Read/Write API specifications
The Read/Write API specification is the primary API specification that governs how third-party providers should connect to banks. It enables Third Party Providers (TPPs) to obtain access to bank accounts for both read and write purposes, for example, fetching account balances and transaction details to make authorised payments. Through the Dynamic Client Registration process, banks allow the Third-Party Providers to enrol automatically without the need to authenticate each one manually. API performance, uptime, and reliability are critical for open banking. Since there is no single official open banking API and each bank develops APIs on its own as per OBIE specifications, the performance of the API of each bank may differ.
Macro Global’s Tavas Open Banking Product Suite and Solutions offers a bundle of solutions to any ASPSPs to extend beyond the scope of monetisation tore-engineer the bank’s portfolio and business model.
- Identity and Access Management
- Developer Portal and Sandbox Environment
- Financial Grade Open Banking APIs
- Strong Customer Authentication
- Administration Portal
- Modified Customer Interface- Fallback Arrangement
- App2App Authentication
- Regulatory Reporting
To learn more about how Macro Global can assist you in monitoring, managing, and mitigating the aforementioned challenges, please visit Tavas – Open Banking Product Suite and Solutions.
The importance of digitalization for banks and financial institutions cannot be overstated. Even before COVID-19, when customer contacts could take place in branch offices and in-person settings, the sector was wrestling with the necessity to fulfill the digital expectations of a changing market. The events of 2020, as well as our reliance on digital interactions and banking self-service, have only served to highlight the need and necessity for banks to become more digital.
Consumers aren’t the only ones who stand to benefit. The shift towards Open Banking has resulted in the emergence of hundreds of new fintech platforms and solutions that are pushing the boundaries of innovation and economic development in their countries. Together, they are forming a new ecosystem for small, medium, and big enterprises that can gain directly from connecting to financial institutions via APIs, or harness the ecosystem between banks, fintech, and consumers to adapt their commercial services to their clients.
As banks map their path to digitization, open banking is developing as a competency that institutions will need to tackle to remain competitive and keep up with an increasingly digital economy.
As a result, there has been a surge in consumer-facing finance innovation using the mandatory API standard. The use of third-party fintech apps for personal money management exploded during COVID-19 in the UK, where open banking has taken off the fastest, with 20% of all UK people utilising FinTech platforms.
According to the same poll, the use of Fintech platforms among young individuals increased to 50% during the pandemic. In the United States, Visa and Mastercard are working quickly to integrate FinTechs onto their platforms to enable open banking and build a network-agnostic payment technology system.
More broadly, open banking will make it easier for retail and business clients to choose from a broader range of goods and services, as well as consolidate ties to adjacent accounts and programmes. This connectivity has the potential to significantly benefit bank clients by allowing them to more easily share information with financial advisors, accelerate loans, decrease costs, and secure data transfer.
Banks who do not embrace open banking, in our opinion, will not only limit their ability to connect with clients in meaningful ways but will also limit their opportunity to remain at the forefront of innovation. Instead of being caught off guard by UK legislation or losing a competitive position in an emerging market, banks should begin planning their strategy and investing in the infrastructure required to fully exploit open banking.
To discover more on how Macro Global can help you to monitor, manage and mitigate the above challenges, please reach us out on firstname.lastname@example.org (or) +44 0204 574 2433.
“Adapting open banking Not only from a compliance perspective, leveraging the OB as a strategic plan for banks for their growth.”
Open banking has significantly grown over the years in the financial services sector due to the dynamics of financial technology. With the integration of customer banking information and application programming interfaces, a bionetwork is created that is conducive to generating effective business processes for the growth of these entities, which includes efficiency in transactional processing systems.
The Transactional processing system is not limited to monetary transactions, but on a broader spectrum, it entails a system of collection, storage, modification, and retrieval of data transactions of a given entity. This in entirety signifies a strategic roadmap for growth in the banking sector as it leverages the data for further complex financial modeling for banking growth in a number of ways. This notwithstanding, open banking ensures sound compliance with regard to technological regulations within this dynamic space.
To drive this point home, I bring into perspective TAVAS, a Payment Service Directive 2 (PSD2) solution, which is an open banking product suite that has made a significant impact on the strategic planning for banking growth in a myriad of ways.
To begin with, TAVAS has integrated customizable application programming interfaces that have been effective in fostering customer service experience and engagement. A good online customer experience may improve the entire customer journey and is a critical differentiator for practically any organization. This can only be done by third-party companies who assist merchants in realizing their full potential.
Centralization of services is another key contribution of TAVAS to open banking. This has come about in a number of facets, the key being seamless onboarding that is so streamlined for online service sign ups, coupled with cutting-edge technology that facilitates efficient account information services, payment initiation services, and confirmation of fund services. These pretty much enhance robust customer centricity.
TAVAS has firmly taken into account the aspect of regulation technology on open banking, as RegTech is what seems to seal financial technology. This has been done by taking into account the security of the online platforms as a means of curbing potential threats from such aspects as cybercrimes and other unauthorized access to these effective platforms. These products and suits are highly secure and safe with full compliance with regulatory technical standards. Secure access to these application programming interfaces gives customers confidence in operating these systems.
RegTech and fintech are ideal ways to leverage open banking for strategic growth in this technologically dynamic era.
To discover more on how Macro Global can help you to monitor, manage and mitigate the above challenges, please reach us out on email@example.com (or) +44 0204 574 2433.
What is Open Banking?
Open Banking, a concept of democratising the customer data fastened with the banks, stimulates an increased competition within the financial services market by bringing more innovation to the quality of the products and services delivered to the customers. Open Banking requires the banks to expose their data in a secure, standardised format, allowing information to be exchanged more freely online between authorised organisations.
This data comprises some simple facts, such as branch locations and specific details about banking products. It enables the customers to easily discover banks that provide disabled access, or to compare the features of various personal and corporate accounts to get the best price. The more significant release concerns the data contained in transactions. Banks have a definitive record of everything we spend, lend, and borrow. Open Banking allows this valuable information to be shared with third companies, who can then utilise it to develop new products.
How does Open Banking work?
Open banking can help businesses accept online payments from customers, speed up new customer onboarding, and provide value-added services to customers. Open Banking enables users to grant secure access to their bank account so that their financial information such as earnings and expenses can be used to provide them with value added services such as budgeting advice or recommendations for other financial products, they may be eligible for. It can help the customers to manage their money in a variety of ways and make secure payments more easily than traditional online banking. Also, it brings new business opportunities to the banks and create a healthy competition in the marketplace in delivering the better customer experience. Open banking can help businesses cut costs, reduce risk, and improve the customer experience. Currently more than 3 million people started using open banking apps and we expect an exponential growth in the usage of open banking by 2023.
Adapting open banking Not only from a compliance perspective, leveraging the OB as a strategic plan for banks for their growth
The Open banking wave provides a new revenue opportunity by creating improved experiences, frictionless banking journeys and customised services that help them to stay ahead of the competition by opening up the shutters for collaboration with innovative fintech firms.
Banks unlock the promise of open banking by revisiting their existing customer authentication and consent management mechanism enabling the safe and secure exchange of data and services for customers. Banks adopting open banking can monetise their infrastructure by exposing different APIs to a wider range of fintech and other financial institutions that will be mutually benefitted from connecting these APIs for building their service offerings.
What is PSD2 in Open Banking?
Open banking differs by country, but in general, it entails banks or financial institutions revealing their financial data to third-party providers via open Application Programming Interfaces (APIs). The scope and format of that data vary and are frequently determined by a country’s specific regulations and implementation standards. In the United Kingdom, open banking began in 2018 with regulations allowing nine of the country’s major banks to implement standards for enabling secure access to customer data. This was accompanied by EU Regulations (PSD2) requiring all banking institutions and payment service providers (PSPs) to grant authorised service providers access to their customers’ financial data with their customers’ consent.
Through Open Data APIs, banks grant access to their financial data available in the UK in a secure, standardised manner. This makes it easier for businesses to use data to create consumer-friendly services. Third Party Providers (TPPs) are companies that use open banking data and should be controlled by the Financial Conduct Authority in the United Kingdom (FCA).
PSD2 (Payment Services Directive Two) is European Union legislation that came into force in January 2016, with a deadline of January 2018 for its incorporation into national legislation. PSD2 is governed by the Financial Conduct Authority (FCA) in the United Kingdom.
PSD2 is designed to make open banking possible and secure by:
- Using multi-factor authentication, we can enforce greater security standards for online transactions (MFA).
- Making it mandatory for banks and other financial institutions to allow account holders to offer third-party applications access to their account and payment data.
PSD2 is a statutory necessity for all payment service providers (PSP) in Europe. It requires banks and all payment providers to open up their data to third-party providers if an account holder consents. It also mandates banks to utilise strong customer authentication (SCA) to improve payment security and reduce fraud.
Open Banking is also a component of the second Payment Services Directive (PSD2). Sometimes these two are confused: Open Banking is essentially the UK version of PSD2. The distinction is that, whereas PSD2 mandates banks to make their data available to third parties, Open Banking requires them to do so in a standard way.
Integrate with TPPs to deliver customer-centric services in the competitive world
Open Banking provides the customers with more ways of managing their money, lending, and making payments. It has also created a plethora of chances for financial innovation.
Open Banking has obliged banks to give customers more control over their financial data by letting them connect their data to other regulated providers, such as a third-party financial management application that can display their transaction data and balances in one location.
Accessing customer bank accounts through a single integrated platform along with open APIs play a vital role within the banking ecosystem interfacing between the banks, third-party providers (TPPs) and payment service users (PSUs). Customers with their consent can leverage the benefits of open banking by securely exposing their data to any of the trusted third-party providers to avail of bespoke financial products and services.
By adopting Open Banking, the TPPs (e.g., Account and Payment Aggregators) offer predominant customer-centric services with enhanced agility accelerated upon obtaining the user’s consent to access their bank accounts.
Benefits of Open Banking for consumers
Open Banking simplifies the consumer’s life by consolidating all their financial information into a single app, allowing them to manage their finances more easily. This may assist consumers in budgeting more effectively and saving money. For example, such apps may help them see their overall financial picture and identify areas where they are overpaying for a utility bill, credit card, or overdraft.
Open Banking enables secure faster payments in the most convenient way. Open banking payments are faster than traditional online payments, especially on mobile. It doesn’t require any credit card details and no need to log in to bank account. Consumers can simply choose the bank from the list shown on the screen and make the payment securely after fingerprint or face ID verification. This can be done in few seconds and the receiver gets the money immediately. It’s as simple as using a contactless credit card in person, and it’s protected by bank-grade security.
Through Third Party Providers apps, consumers can generate their financial statements for rental agreements, mortgages, loans, and investments. Regulated companies can use open banking with consumer’s consent to get an overview of their income and expenses, for example, to make a quick decision on loan or rental application. Also, it is not required to upload or print any bank statements as the consumers can directly give access to certain services to the financial institutions through the apps more quickly you can sign up for certain services and apps more quickly.
Benefits of Open Banking for Businesses
Open Banking facilitates online accounting by providing safe and secure access to the financial records. It can even assist in classifying business expenses for tax and accounting purposes.
It can make it easier to obtain capital. Potential lenders can use open banking with the consent to gain an overview of the business finances to make a quick decision on loan application.
Open Banking enables online payments at low transaction fees and reduce fraudulent transactions and increase the conversions. Any business that transacts online can use open banking can accept instant bank payments without the use of card networks.
It can assist you in accelerating customer onboarding. If you need to collect financial information from your customers at signup, such as proof of income or bank account ownership for a payment, open banking can assist you in doing so in a secure, automated manner.
Macro Global offers 40+ compelling use cases for businesses around open banking. Pls reach out to us to explore more.
Open Banking APIs Endpoints
Open Banking relies extensively on the use of Application Programming Interfaces (API) to securely share customer data among banks, as well as allow third-party providers (TPPs, e.g, Account and Payment Aggregators) to access the bank’s technology environment to build innovative applications and services.
Banks expose the Account Information Services (AIS) and Payment Information Services (PIS) through various API endpoints.
Account Information Services (AIS) through which the bank account-related information of the user such as account holder name, account type, account balance, account statement, etc. are displayed within the TPP application.
Payment Initiation Services (PIS) through which the users can initiate a payment to the different beneficiaries from their multiple bank accounts through the TPP’s application without accessing their dedicated online banking applications.
Some of the AIS & PIS data endpoints are set to be mandatory in the Open Banking Framework (example: accounts, balances, transactions) which means these data should be exposed by banks through specific API endpoints.
There are some data endpoints (example: supplementary account info, offers, events subscription) which are optional hence banks can decide whether to expose or hide these data. Optional APIs can be integrated subject to the bank’s requirements.
Conditional APIs are the data endpoints that should be exposed if the banks have certain services available in their net banking environment. (example: beneficiary data, future payments, standing orders). These data endpoints are exposed only if the bank offers these services.
Note these mandatory, conditional & optional APIs for all the TPPs vary for each country subject to their local Open Banking Framework and regulations.
Adoption of Open Banking in the UK and Europe
The efficacy of Open Banking has always been dependent on the large financial services providers, who ultimately control the data. It was dependent on them allowing third-party providers to use their Open APIs, as well as assisting in the promotion of the new options and benefits to consumers. Is this what happened?
It appears so, despite lethargic beginnings marked by a lack of customer awareness and traditional institutions that were hesitant to get the system up and running. And, with the collapse of conventional banks and the advent of challenger banks that have organically connected with fintech, Open Banking has been a stimulus for the expansion of fintech in Europe.
Open Banking in the global perspective
Open banking has already emerged in various countries having different regulations but open banking as a concept goes well beyond the regulatory environment and is applicable globally to uplift the existing landscape of the financial industry.
Countries like UAE, Saudi Arabia and Qatar are driven by the market where the third-party providers and banks are allowed to develop their API platforms as they are conscious of the strategic importance of Open Banking to attract new customers and to gain a competitive advantage.
Countries like the UK, Bahrain, Egypt and Kuwait are driven by the regional regulations where the APIs are developed as per the government specifications and sharing of data between entities is controlled & monitored by the government. These regulator-driven countries should perceive open banking as a chance to promote innovation in their financial services rather than a compliance burden as it embraces a more inclusive financial culture and brings all categories of individuals and businesses into an ecosystem where they can further integrate and flourish as a broader economy.
Is Open Banking safe?
Security is the most important concern in Open Banking for all the parties involved. Would it render banking data exposed to attack? Can consumers put their trust in new fintech providers?
So far, no PSD2-related cyber incidents have occurred, however, the Financial Conduct Authority is probing opaque marketing and data used by some digital companies, particularly considering GDPR, which went into effect this year.
Open banking has lowered the risk to customer data by reducing the popularity of scraping, the original method used by many fintech businesses to acquire users’ account information. In addition, AISPs and PISPs must be registered, licenced, insured, and controlled under PSD2.
The ultimate responsibility is on third-party providers (TPPs) to protect their infrastructure from cyber-attacks, while banks are concerned with limiting fraud risk because they are the first party accountable for unauthorised financial transactions from a customer’s bank account. Therefore, banks should invest in a diverse set of analytical technologies to validate authorized customers and spot threats.
Insurance security also has been improved, as PSD2 regulations mandate PISPs and AISPs to have a specified type and degree of technology-based professional indemnity and cyber insurance. One of the reasons this is critical for fintech is that if a third-party provider is breached, it is required to repair the situation and restore any money to the customer via their bank within 72 hours. This can be covered by PSD2 insurance.
To discover more on how Macro Global can help you to monitor, manage and mitigate the above challenges, please visit Tavas – Open Banking Product Suite and Solutions.
Open Banking fosters an increased competition within the financial services market to accelerate financial inclusion by acquiring and addressing the financial needs of the unbanked, underbanked and ‘unhappily-banked’ populations. It acts as a catalyst for digital transformation while bringing in more innovation to the traditional banking practices and makes the financial offerings affordable to the unbanked community. As the term suggests, Open Banking believes in democratising access to banking services and making them available in real-time to the customers so that they can better manage their finances.
According to the research data published by World Bank, it is estimated that the banks could generate over $380 billion by acquiring the unbanked population only around the MENA region, as almost 69% of adults continue to remain unbanked. Globally, 1.7 billion adults (or 31% of adults) are estimated to not have even a basic transaction account. The transition to the new open ecosystem builds a profound opportunity to forecast a surge in the bank’s revenue. The perks of adopting a well-defined Open Banking platform extends beyond the scope of monetisation to re-engineer the bank’s portfolio and business model to accelerate into new market space by automating the customer onboarding, digital KYC/AML verification and real-time transaction monitoring processes.
Open Banking has the potential of promoting financial inclusion to the unbanked population by making it seamless for them to create an accurate and reliable financial profile which in turn makes them eligible to access the mainstream financial products and services. For the banks, it aids in widening the pool of potential customers by having a deeper understanding of the prospect’s financial history in a quick and effective manner significantly reducing the operational expenditures.
Open Banking strives to remove the barriers that exclude people from participating in the banking services. Thus, Financial inclusion built on sustainable business models such as open banking embraces a more inclusive financial culture and brings all categories of individuals and small businesses into an ecosystem where they can further integrate and flourish as a broader economy.
With Macro Global by your side, Transformation into Open Banking is no more a ‘Big Bang’ or ‘Rocket Science’ for the banks. Click Here, to know more about how MG empowers the banks with its “ Tavas- Open Banking Product Suite and Solutions ” to be both transparent and secure when engaging with third-party providers (TPPs) in their journey of Open Banking transformation. Macro Global has several use cases around this and can assist FIs to implement with right combination of APIs and technologies leveraging from existing OB ecosystem to achieve the desired business results.
To discover more on how Macro Global with its subject matter expertise can help you address the challenges, please reach us out on firstname.lastname@example.org (or) +44 0207 993 2009