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December 07, 2016
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Banking Innovation in the UK and the Open Bank Project..

“Banking as a service has long sat at the heart of our economy. In our digitally enabled world, the need to seamlessly and efficiently connect different economic agents who are buying and selling goods and services, is critical. The Open Banking Standard is a framework for making banking data work better: for customers; for businesses and; for the economy as a whole.” – OBWG (Open Bank Working Group) co-chair and Barclays executive Matt Hammerstein

Introducing Open Banking Standards…

On a global basis, both the Financial Services and the Insurance industry are facing an unprecedented amount of change driven by factors like changing client preferences and the emergence of new technology—the Internet, mobility, social media, etc. These changes are immensely profound, especially with the arrival of  the “FinTechs”—technology-driven applications that are upending long-standing business models across all sectors from retail banking to wealth management & capital markets. Complement this with members of a major new segment, Millennials. They are increasingly use mobile devices, demanding more contextual services and expecting a seamless unified banking experience—something akin to what they  experience on web properties like Facebook, Amazon, Uber, Google or Yahoo, etc.  These web scale startups are doing so by expanding their wallet share of client revenues by offering contextual products tailored to individual client profiles. Their savvy use of segmentation data and predictive analytics enables the delivery of bundles of tailored products across multiple delivery channels (web, mobile, call center banking, point of sale, ATM/kiosk etc.).

open-bank-project

Supra national authorities and national governments in Europe have taken note of the need for erstwhile protected industries like Banking to stay competitive in this brave new world. Among other national governments, the U.K. has been fast at work on spurring innovation in banking while protecting customers via an open standard for its financial system . The major goals are to protect customers, provide them more banking choices while encouraging technological innovation in banks.

With the passage of the second revision of the ground breaking Directive on Payment Services Directive (PSD-2),  the European Parliament has adopted the legal foundation of the creation of a EU-wide single payments area (SEPA)[1].  While the goal of the PSD is to establish a set of modern, digital industry rules for all payment services in the European Union; it has significant ramifications for the financial services industry as it will surely current business models & foster new areas of competition. While the PSD-2 has gotten the lions share of press interest, the UK government has quietly been working on an initiative to create a standard around allowing Banking organizations to share their customer & transactional data with certified third parties via an open API.  The outgoing PM David Cameron’s government had in fact outlined these plans in the 2015 national budget.

The EU and the UK governments have recognized that in order for Europe to move into the vision of one Digital Market – the current system of banking calls for change. And they foresee this change will be driven by digital technology. This shakeup will happen via the increased competition that will result as various financial services are unbundled by innovative developers. To that end, by 2019 – all banks should make customer data – their true crown jewels – openly accessible via an open standards based API.

The Open Bank Working Standard Report API…

As mentioned above, the U.K. has been working on an open standard for its financial system for nearly a year & half. The Open Bank Working Group (OBWP) was created to set standards how banking data should created and accessed openly. This initiative covers the following broad areas – Data Standards, API Standards & Security Standards to protect consumers while spurring innovation via open competition.

open_banking_scope

                            Illustration: Components of the Open Banking Standard (ref – OBWG Working Group)

Under the Open Banking Standard (OBS) – expected to be legal reality over the next 2-3 years, any banking customer or authorized 3rd party provider can leverage APIs to gain access to their data and transactions across a whole range of areas ranging from Retail Banking to Business Banking to Commercial Banking.

Open Standards can actually help banks by helping them source data from external providers. For instance, the Customer Journey problem has been an age old issue in banking which has gotten exponentially more complicated over the last five years as the staggering rise of mobile technology and the Internet of Things (IoT) have vastly increased the number of enterprise touch points that customers are exposed to in terms of being able to discover & purchase new products/services. In an OmniChannel world, an increasing number of transactions are being conducted online. In sub-verticals like Retail Banking, the number of online transactions approaches an average of 40%. Adding to the problem, more and more consumers are posting product reviews and feedback online. Banks thus need to react in realtime to piece together the source of consumer dissatisfaction.  Open Standards will help increase the ability of banks to pull in data from external sources to enrich their limited view of customers.

The next post will examine the five major implications for UK based Banks in light of the OBS.

REFERENCES…

[1] The Open Banking Standard –
https://theodi.org/open-banking-standard

 

 

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