Open banking revolution coming

New regulations encouraging open banking may bring additional operational challenges, but research shows open banking has the power to transform the global banking landscape over the next decade, writes JACOB MORGAN of Forrester.

Open banking is the next step in the digital banking evolution. By participating in partnerships and collaborative ecosystems, banks will be able to further their drive to enable customer outcomes.

Digital technologies such as APIs will sit at the heart of open banking as software and accessibility drives further disruption and business models evolve. Open banking blows apart the insular nature of many banks and will transform the banking landscape, as noted in the new report: The Open Banking Revolution is Imminent.

There have been a number of moves from global regulators and banking advisory committees pushing for a move towards open banking over the past few years. Europe is less than a year away from implementing the second phase of the Payment Services Directive (PSD2). The Open Banking Development Group was set up to devise a global Open Banking Standard late 2016 and Australia and the UK have also seen moves towards legislated open banking standards.

The regulators are promoting open banking to drive innovation and increase competition in the market, to benefit the customer.

While these are lofty ideals, few understand either the full implications or the opportunities offered by open banking.

Among the common misunderstandings is confusing open access with a relinquishing of control. While interfaces are public facing, banks do not need to relinquish access control, management of data and services, or the ability to monetise access.

APIs will open up collaborative ecosystems which can enable real-time connections and collaboration opportunities for banks and their partners. Allowing third parties access to product catalogues, business processes, data and business processes, banks can expand their presence, boost sales and increase revenues. Moreover, some banks are already experimenting with open developer platforms which are driving innovation.

However, there are potential downsides to the new requirements, unless banks put their customers at the heart of their future strategies.

Open data will allow for granular product and service comparisons, which could lead to dissatisfied customers switching banks.  Open standards will also amplify interoperability which will, in turn, foster collaboration. New products and services will drive competition into the market and could pose a threat to banks which are complacent. A more open environment will also make barriers of entry far lower. For banks which have been used to the prohibitive licensing and regulatory hurdles, having a flood of nimble, new entrants could pose a further business threat.

True open banking transformation will not happen overnight and Forrester believes that this may only materialise over the next decade. However, the report details some actions which banks can take in the shorter-term to prepare for the future.

This includes building a strategy which is centred around what future partners will need from the engagement, including developers and third-party partners. The company has also advised banking professionals to spend some time determining how they will build their future ecosystems as well as the role they would like to play in it.

Finally, the research cautions that banks should build flexibility into their strategy. Prioritising investments that will ensure fast response times in the technology as well as the processes and skills will drive agility into the organisation and better prepare it for the future.