Uncovering data as the financial industry transforms

What this looks like varies depending on where you’re located. The U.K. implemented open banking rules in 2016, and adoption is accelerating, with customers taking advantage of new payment methods and improved data for financial decision-making. European countries are moving more slowly but have a framework in place with the European Union’s revised Payment Services Directive, known as PSD2.

Brazil is an open banking leader in Latin America, having begun in January 2021 to phase in new requirements that help consumers compare financial products, gain access to personalized offerings, and more. These rules push traditional banks, digital banks, and insurers, among other institutions, to adopt common data standards and improve interoperability. GFT worked with the Brazilian central bank and the Banks Federation to help define the technical standards and APIs that are being used for open banking.

At the heart of the concept, open banking recognizes that consumers’ banking data belongs to them, not the banks where they do business. The goal is to make it possible for that data to move with any customer that opts to participate—in a standardized format, using common APIs, across and among all financial institutions.

This is a powerful idea for consumers, holding the promise of increased competition in financial products, more innovation, and greater financial inclusion. It has the potential to simplify and improve the consumer experience with a range of financial products.

Progress toward open banking can be an attractive proposition for some financial companies, allowing access to a trove of information on the financial habits and needs of a customer, even when they have little history with that customer. Open banking offers significant opportunity for businesses positioned to develop or take advantage of new business models.

At the same time, aspects of open banking may give other companies pause. Updating systems so that they communicate effectively through open banking APIs can be expensive, for one thing. Some companies may see competitive advantages that they have long enjoyed eroded by the changes.

Open banking puts the customer at the center of the banking relationship, with financial institutions gaining a better understanding of customer needs and motivations. A bank may be able to identify a customer at risk of leaving for a competitor, for example, and mitigate the situation with a personalized offer such as a discount on a service. Or a bank might use open banking data to identify a specific behavior, based on a defining moment a customer’s life, and react with a strategy to offer an attractive product.

In the U.S., regulators have not yet embraced a prescriptive approach to open banking, but other forces are opening and changing the market nonetheless. A 2020 report from the Federal Reserve Bank of Boston noted that the emergence of fintechs and the innovation initiatives of existing financial institutions are “key drivers” of open banking in the U.S.

The banking industry in the U.S. is complex. Several well-known large banks control a significant share of the market. These face the challenge of updating legacy systems to work seamlessly with today’s API-based technology and financial communications architecture. There are also digital startups making inroads in the U.S., and thousands of smaller local and regional banks that fill an important role. Across this entire landscape, one finds a broad range of pressing technology needs.

Consistent with the global trend toward instant payments and peer-to-peer transactions, the Federal Reserve plans to launch FedNow, an instant payment service that will allow anyone to send money in a matter of seconds to any other U.S. account. Combined with open data and open banking APIs, there is plenty of room to offer new payment models for both individual and business customers.

Every financial institution in the U.S. market needs to know how it will stay out in front of the dramatic changes that are occurring. The strategy must include how the company will establish the API-based system it requires to be ready to send data when requested and request data when needed.

For financial institutions with outdated systems, the task at this juncture may be to replace their core banking technology with an up-to-date microservices architecture. GFT has worked to implement this kind of digital transformation for a range of clients in the U.S. and elsewhere.

The strategic partnership GFT has with Thought Machine allows clients access to a state-of-the-art, cloud-native, decoupled core banking platform. Thought Machine’s Vault platform has been built from the ground up around synchronous and streaming APIs. It can be configured to easily run any type of retail or corporate banking product—and can ready financial institutions of any size for an open banking future.  

GFT has also helped to build a digital bank from the ground up, working with Standard Chartered in Hong Kong when it created Mox. This cutting-edge mobile banking solution is entirely cloud-based and API-first, and it’s fully scalable, with the potential to handle millions of accounts and products as it grows.

However open banking progresses in the U.S., financial institutions are going to be challenged to bring flexible, scalable, API-based technology to market—and GFT has the expertise to help companies along this path.

• Have you completed an assessment of how open finance practices will change your technology requirements in the markets where you operate?
• Do you have a technology strategy that can keep up with regulatory demands and competitive innovations?
• Can existing systems work effectively with open finance APIs?
• Are you relying on patchwork fixes to meet emerging technology requirements?
• Is your existing core banking technology serving your organization effectively, or do you need to reassess or rethink your architecture?
• Are your products being designed with an API-first strategy?

Sources:

• “Open Banking Impact Report,” Open Banking Ltd., June 2022

  “The Revised Payment Services Directive (PSD2) and the Transition to Stronger Payments Security,” European Central Bank, March 2018

  Susan Pandy, “Developments in Open Banking and APIs: Where Does the U.S. Stand,” Federal Reserve Bank of Boston, March 2020