Open banking reloaded
Because the original idea of open banking has been forgotten.
Open banking development has ground to a halt. Not just in Switzerland, but in the EU, too. While the reasons are different, the effect is the same. The open banking revolution has definitely not taken place (yet). It is fascinating to see that while open banking is being implemented under completely different framework conditions, fundamentally, it has not progressed any further. The reasons for this remain unclear.
The PSD2 Directive is prescribed under regulatory requirements in the EU area and has been in force since September 2019. This legally obligates banks to guarantee access to account information and payment processing for third parties via APIs. It also stipulates that transactions need to be secured using multi-factor authentication. Nothing more and nothing less.
Switzerland, on the other hand, relies on a market-based regulatory approach that foregoes legal requirements. The SBVg (Swiss Bankers Association) and Swiss Fintech Innovations have come together with numerous relevant actors in the financial centre to define API standardisation in various working groups.
Neither the European nor the Swiss approach has resulted in mainstream acceptance of the open banking idea. In the EU, the PSD2 itself is an obstacle. It only comprises the few use cases in the areas of account information and payment transactions and, particularly in the German market, the strong new authentication mechanisms are regarded as a backward step in terms of user-friendliness.
As a result, market players have adopted different positions. Some banks are following the ‘minimum compliance’ approach and implementing the legal minimum of opening, since the investment costs are substantial and the monetisation possibilities appear limited. In turn, institutions that have an open banking strategy lack the variety of possible use cases and their standardisation.
They are making a virtue of this necessity and defining their own API standards for their own ecosystem. All at once, new use cases such as age checks, credit checks, branch finders, client onboarding, car finance, Alipay QR payments and financial market data are emerging. While this is far-sighted and highly innovative from a bank’s perspective, at the same time, the various independent initiatives prevent standardisation.
New eco-systems are likeky to emerge in place of many traditional industries by 2025
When it comes to operationalisation, the Swiss financial services sector lags far behind Europe – no regulation means no pressure. So it’s satisfying to see that more and more use cases – beyond those covered by PSD2 – are being addressed; for example, in the areas of asset management, mortgages and multi-banking.
Diversity on the one hand, standards on the other – real open banking requires both, and, ideally, transnational solutions, but still has a long way to go.
On closer inspection, it is clear that the original idea of open banking has been lost somewhere along the way. The open banking initiative originated in the UK. A regulatory competition analysis by the Competitions & Markets Authority (CMA) in 2017 found that there is too little competition, too little transparency and too little innovation in retail banking. A regulation should be implemented to allow bank clients access to their data and to provide them with the ability to make this available to third parties under controlled conditions.
Many of today’s Swiss open banking activities no longer focus on the benefit to the end user and the availability of their data to third parties. The use cases are primarily defined and prioritised from the point of view of financial institutions. While this in itself is not objectionable, it is no longer open banking in the spirit of an initiative that places client needs before the needs of the financial industry.
Open banking in this form is most likely a romantic notion. The hope that large swathes of banking data and features will be standardised internationally and available free of charge, and that they will become fancy new fintech tools at the touch of a button, so to speak, is likely to remain wishful thinking in the short term.
In reality, while the financial industry might talk about open banking, what it means by this concept and what it does are something else quite remarkable. Under the concept of ‘open finance’, the first banks are starting to transform their business models into platform ecosystems. While the vast majority are still sitting on the sidelines, watching to see if and how standards are slowly emerging, the pioneers are already at work. The biggest players have been at it a long time already and are planning on going all in. Whether it’s Postfinance with Valuu or UBS with Key4 or SIX with bLink – all have launched their own platforms. In this way, they are trying to enter new digital markets and underscore their aspirations towards an orchestrator role in these markets. One principle of the platform economy is that the winner takes it all. There is only room for a few large providers; whoever reaches the broad masses first will dominate.
A larger number of financial institutions are pursuing a strategy of opening via dedicated interfaces (APIs) with a view to entering into specific cooperation between banks, insurance companies, asset managers, mortgage and real estate marketplaces, traders, etc. And they all have one thing in common: they are not waiting for standardisation, but instead trying to find their role in new financial ecosystems and position themselves.
These developments are very welcome and are paving the way for open banking. Players in the Swiss financial centre have identified the potential of the API economy and business ecosystems and are increasingly investing in the expansion of the required platform components. This is leading to optimisations in the retail bank model in combination with selected ecosystems, to new partnerships across established sector boundaries, to the optimisation of client interaction points and, in general, to new digital solutions.
These are good prerequisites and a fundamental step in the digital transformation of a financial services provider, but we are still a long way from ‘open banking’.
What might open banking look like in future?
Open banking and open finance are taken far too narrowly as terms. They restrict thinking. They limit the imagination to the respective industry silo. What is needed now is a much larger intellectual framework and a different mindset. The focus should not be on banking and finance, but on clients with their needs and data.
Bill Gates’ quote from 1994 is more relevant now than ever before: ‘Banking is necessary, banks are not.’ In the age of digitalisation, the phenomenon is finally becoming truly visible and tangible thanks to digital business ecosystems such as mobility, health, housing, travel and education – not banking. But all of these ecosystems require banking services. ‘Embedded finance’ literally refers to the integration of financial services into the customer journey of non-banks, but that’s not open banking either.
It is clear from these principles that open banking is not the right term. Even if the term is still sometimes used differently, open data would better describe the core element – the open handling of data. Time will tell.
It will undoubtedly take some time before the majority of the Swiss financial landscape is strategically, technically and organisationally ready to embrace a consistent opening up, new forms of cooperation with clients, partners and the competition, and open banking culture in day-to-day operation.
The approach of the regulator and interaction between the Swiss and EU markets will be able to set certain framework conditions, but the larger market movements will be triggered by the pioneers. That is, those who adopt a strategic approach and invest early, position themselves in various business ecosystems and gain a competitive advantage, and those who prove that clients will accept clever solutions with a corresponding willingness to pay.
By Ralph Hutter
Head of Ecosystems and Partnerships
Finnova AG