Imagine being constantly overdrawn in your checking account and having to pay expensive fees. Then, after finding online an authorized firm to help you manage your expenses, you download the application and give your consent to this company to access your bank information, while formally asking your bank to securely share your data. Through the application, this firm gives you advice on how to manage your finances and suggests other accounts with more favorable conditions if you often overdraw. Then, you decide to change accounts.
This, and much more, is part of the promise of open banking. "Users own their data and have the power to decide who, when and how to share their information," said Raúl García and Ankit Sharma, of PwC Mexico, in Forbes Mexico.
This is done through the so-called Application Programming Interfaces (APIs), which are a set of requirements that govern how one application can communicate and interact with another. An open API allows a financial institution to redirect with some flexibility the client's data to the devices and applications that he/she prefers to use, whether they are part of the bank platform itself or from third parties.
A key aspect is security. A common mistake is to confuse open banking with the notion that a bank publicly provides all of its customers’ information. It's not like that at all. What is in fact open is the API. Access to private data can only be granted by its owner and the whole process is subject to technical and security protocols.
Banks are using open banking as a competitive tool to partner with financial technology firms, fintechs, to better meet the needs of their retail and commercial customers, taking advantage of the tailored solutions they offer. At the same time, banks can focus their resources on their core and most profitable business.
“In Latin America we see that banks are working on preparing their core banking infrastructure in terms of making their services 'application focused',” says Santiago Vargas, product innovation manager at TODO1, a Miami based digital services company for the financial sector. “Likewise, we are exploring how to add API management layers that guarantee them control and security with potential third parties that will use them in the future.”
One of the factors that is pressuring traditional banks and encouraging the adoption of an open banking model is the arrival of the so-called Neobanks, that is, 100% digital banks, Vargas adds.
The next step is regulation. “I think that in Latin America we no longer talk about whether or not open banking regulation will come, but when and under what terms. Banks are closely monitoring what is happening in Europe and Asia. For now, scenarios are explored, raising perspectives in the short, medium and long term,” Vargas says.
Mexico has already approved the FinTech Law, which directs financial institutions to set-up programming interfaces for standardized computer applications that allow third-party connectivity and access to customer information.
The pioneers of open banking regulation and the adoption of APIs have been the United Kingdom, with the publication of the Open Banking Standard in 2016, and the European Union, with the Payment Service Directive 2 (PSD2).
There is no mandatory regulation to adopt the open banking model in the United States yet. However, competition is driving banks to open their APIs, which has resulted in the proliferation of bank portals where third parties can access them.
"The open banking model offers banks the chance to maintain and increase their customer base by integrating the diversity of third-party services that they use to personalize and make their financial product unique," Anirban Bose, global head of banking and capital markets at Capgemini, a tech consulting firm, says. “Banks that do not follow strategically the open banking trend and don’t position themselves (in the game), risk losing their role as middlemen to the client," he adds.