Open Banking & APIs – Regulatory Compulsion or Catalyst for Innovation

By Debasis Mohanty . November 16, 2022 . Blogs

Over 86% of global banks are looking to use APIs and facilitate open banking capabilities.

The concept of open banking has been around for many years but only for the sake of regulatory compliance. 

However, there has been rapid adoption of open banking globally in the wake of the pandemic. Most small businesses and individuals have found the open banking approach easier as a source of credit. They can easily share real-time data with third-party providers by authorizing their banks to access a wider supply of favorable terms. And this is just one of the many driving forces for the accelerated adoption of open banking globally. 

What Is Open Banking?

Open banking has become a global trend, with its market estimated to reach $43.15 billion globally by 2026.

In 2016, the Competition and Markets Authority (CMA) published a banking report and indicated that conventional banks did not have to compete hard to acquire customers. This resulted in newer banks finding innovative solutions to find more customers and grow better. 

Open banking is a response to this situation and emerged under the Revised Payment Services Directive (PSD2) regulation in Europe in 2018. This regulation requires all financial institutions to expose the financial data, banking, and transactions of customers with their appropriate consent in the form of secured APIs (Application Programming Interfaces). Today, it is not just a regulation and creates a win-win situation for all. 

Customers get the best services with high convenience; banks do not need to worry about customer experience management, and tech companies can leverage powerful financial data and instruments to gain more penetration into challenging markets with the help of informed decisions. Explore why open banking is the future.


What Are the Factors Driving Open Banking?

The popularity of open banking has accelerated in the past few years in the wake of the pandemic and intensifying focus on customer experience. Social distancing resulting from the pandemic drove most customers toward remote and online banking services. The two primary factors supporting the growth of open banking include a regulatory push and the proliferation of open APIs.

To put growth into perspective, in the first two quarters of 2020, the open banking API platforms grew by 49% globally. Open banking APIs are also estimated to have a high impact on the banking business in the coming years and are poised to change the future of the banking industry. 

APIs help banks in solving problems, create value for clients, acquire customers, expand product lines, and enable innovation. Traditionally, banks only manufactured their products and services and distributed them through their channels. But now, with the growing impact of open banking and APIs, banks are offering various financial and non-financial services sourced from third-party services. Some examples include:

  • Joint products with partners: For example, co-branded credit card launched by Paytm in association with Citibank.
  • Third-party collaboration to deliver rival products – Paytm is offering digital loans and high-value fixed deposits in association with ICICI bank and IndusInd bank.


How Do Open Banking & APIs act as a Catalyst for Innovation?

Open banking enables banking and fintech firms to innovate as it provides a standard, advanced, and comprehensive way to collaborate and leverage technology.

  • Standard onboarding process for the third-party provider (TPP) – The third-party service providers must sign contracts with different banks to start a partnership. The approach supports the Dynamic Client Registration (DCR) approach. 
  • Standardized APIs – There are specific guidelines in every region or country that need to be followed by banks while exposing their data as open APIs. The participating banks and service providers must adhere to these specifications to ensure a positive end-user and TPPs experience. 
  • Security – The consent management initiative in open banking helps in managing the consent of customers in the context of their financial data. It allows customers to choose what information can be accessed by third-party providers and for how long. 
  • API marketplaces and developer portal – These platforms enable banks to expose APIs to third-party service providers. The fintech firms come in search of relevant APIs on the developer portal.
  • Innovative core services – Providing customized technological solutions and driving innovation is not the core service of banks and financial institutions. Open baking enables banks to focus on improving their core services and bringing more customer-focused technological innovations to the forefront. 


Open Banking as a Catalyst for Innovation – The Way Forward

In 2008, when tech was making its way into the financial industry, banks were hesitant to associate with smart and agile entities, and understandably so. But today, banks have become much more agile. With the move to open banking and the API economy, banks are restructuring themselves to deliver customized offerings. This change means that banks are now more focused on how well the bank collaborates and integrates into the open banking and API economy. 

The innovation in banking and financial services will enhance more with the bank-fintech partnership revolution and huge influences from mobile, cloud computing, big data, and artificial intelligence in the coming years. 

If you are also thinking of implementing open banking practices while addressing regulatory compliance, consult your business requirements with us today.

Debasis Mohanty

Debasis heads the delivery for all client engagements at Verinite. He has a long track record of delivering high quality, responsive, secure and cost-effective business and technology solutions in BFSI domain. Outside his work, he is an amateur animator, a sports enthusiast, a voracious reader and a Trivia buff.

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