Huge amounts of data about our activities are collected by numerous devices every day. Mobile phones, web browsers, cash registers, and credit card readers are quietly reaping and sharing data about us. Where we shop, how much money we spend, what online shops we frequent and what our tastes and preferences are in virtually anything from food to furniture.
That our activities are being recorded and the information shared among various service providers can be seen as a positive development. It is often how our favorite products and services are improved and tailored to what we want. Targeted promotions based on previous purchases and current location is one example, letting consumers save money on regularly-purchased items when and where they need them.
Up until now, banking and financial services have avoided this trend. Most banks are still stuck in the mindset of “protecting” their customer’s financial data while keeping their own service offerings private. In doing so, banks ring-fence their account holders so that it is most convenient for them to use the bank’s own services such as credit cards, investment funds, money transfers and loans.
This is, unfortunately, why most of us cannot use our online banking app to shop around for the best interest rates across multiple banks, compare investment offerings, or analyze our expenditures down to the number of coffee capsules we bought last month. Banks would have to share financial data with each other as well as 3rd party fintechs and retailers in order for this to happen.
Entering a new era of “Open Banking”
Open Banking is a new regulation which came into effect in the UK in 2018 with the goal of improving customers’ banking experience. It requires banks to publish accurate information about their services so that consumers can evaluate and compare them. This transparency also motivates banks to provide their customers with the best possible service.
Traditional banks also control account holder data and decide who has access to it. Open Banking allows account holders to decide who has access to their financial data, opening the door for innovative fintechs to offer new services based on an account holder’s financial needs, and the ability to compare service offerings across multiple banks. New services include better overview of expenditures, the ability to shop for the best interest rates and tailored investment portfolios, or mortgage auctioning services.
The UK has been the first mover in this promising new financial sector. January 2019 marked the first year since the UK’s Open Banking initiative was introduced by the UK government’s Competition and Markets Authority. It resulted in traditional large banks losing their tight control on payments services while allowing fintechs to gain access to a large customer base, potentially creating a new era in retail finance.
Although still early days, in the UK 67 financial services firms are now using the Open Banking standard and millions of monthly transactions have already occurred, a positive indication of the traction that the standard is already achieving.
Creating a shopping mall for financial services
Whereas today most of us depend on a few banks and insurances to provide specific services, Open Banking will let us browse a shopping mall of innovative services tailored to our specific financial situations. Need to take out a new mortgage? Let multiple providers bid for your business based on permissioned access to your financial and credit history. Just inherited a large sum of money? Allow multiple investment services to bid on providing the best interest rates or investment proposal based on access to your anonymized bank account details. Want to optimize your monthly spending habits? Allow 3rd party fintechs to view your precise purchasing behaviour and receive proposals on how to lower or optimize your outgoing cash flow.
The API: the essential link
All this collaboration and sharing of data is possible thanks to a useful link between trusted parties: the “Application Programmable Interface”, or API. This is just a techy term for a network link (often an encrypted link over the internet) and set of mutually understood instructions (protocol) that allows one computer to exchange meaningful data with another computer regardless of where they are located or who owns them.
APIs have been in used for years by businesses who want to share information with each other. What makes Open Banking different is that it is an open protocol available to all that fully defines the content and fields that must be populated when exchanging financial data between participants over APIs.
Just as publication of the internet protocol led to the creation of the World Wide Web, mass adoption of the Open Banking protocol has the potential to revolutionize the retail financial industry.
A driver for security
One of the main inhibitors of the exchange of financial information outside a bank’s firewall is security. Not only is financial information confidential, it is a main target for manipulation and cyber theft. Open Banking is thus becoming a main driver for the adoption of multi-factor authorisation protocols such as OpenID Connect, which is currently one of the best ways to grant third-party access to account information while maintaining privacy and security of the account holder’s data. OpenID is an established authentication protocol already in-use by over 1 billion websites including Amazon.com, Microsoft, BBC and PayPal.
INITIUM: Supporting the Open Banking initiative
A new breed of bank, INITIUM Group, is particularly interested in supporting fintechs that are leveraging the Open Banking standard to create new and compelling financial services for consumers.
INITIUM supports fintechs with the banking services they need to operate their business; corporate accounts, payment clearing, card issuing and acquiring and liquidity services. Advanced services include API integration into client platforms.
With seasoned banking CEO Daniel Spier at its helm, INITIUM is building a bank built from the ground up with the innovative technology and automation required to quickly to meet the needs of pioneering firms in the fintech sector. With a focus on innovative startups, INITIUM will offer corporate banking services with multi-jurisdictional reach across five countries in Europe, the Middle East and Asia.