Much has been said about how technology is impacting the creation of new financial services and products. In the new era of data and applications, what are Open Banking and the APIs that are shaping the banking of the future?
In the field of financial services, Open Banking is a service paradigm that is part of the financial industry’s growth. In general, it suggests that consumers freely reveal their bank data to third parties – which can include both banks and corporations from other industries – in order for them to develop innovative, more efficient, and targeted goods and services.
Users may pick the solutions that provide the greatest experiences and benefits for managing their money and accounts thanks to Open Banking. Financial institutions, for their part, may boost efficiency, improve their innovation processes, and establish new revenue streams.
According to Statista, the yearly rate of Open Banking users is predicted to increase by 50% between 2020 and 2024, rising from 12.2 million to 63.8 million over this time period. Globally, there are more than 24 million Open Banking customers, with this figure predicted to expand to more than 130 million by 2024.
What are TPPs and what services do they provide?
Third Party Providers are organizations that leverage client data to produce this new portfolio of products and services (“TPP”). TPPs use application programming interfaces to securely communicate with banks in order to accomplish Open Banking (APIs).
API sandboxes are being promoted by financial institutions and Open Banking organisations so that the developer community may test interfaces to bank services.
A vehicle sales platform, for example, can promote and administer a bank loan without diverting to the bank’s corporate site.
Beginnings and regulations of Open Banking
It is critical to establish a regulatory environment that favors Open Banking in order to carry out a proper Open Banking plan. This legislation focuses on ensuring that people’s privacy and security are protected by regulations and procedures.
Open Banking was founded in 2015, when the UK Competition and Markets Authority ordered banks to open their applications to TPPs.
The European Union revised the Payment Services Directive (PSD2) the same year with the same goal in mind. Furthermore, additional security restrictions for financial transactions and access to payment accounts were mandated as part of these laws.
It should be highlighted that the information can only be used for the reasons that the client has permitted, and only with authorized TPPs that conform with both the regulatory authorities and the established security, privacy, and confidentiality criteria.
Open Banking in Europe, the United States and Latin America
According to a recent study conducted by Open Banking Europe, the most popular services offered in the scope of the European Economic Area, after analyzing nearly 300 companies of this type, are: Payments (49%); Management (42%); TPP (24%); Administration (20%); and Security (19%).
There are presently no government-defined Open Banking guidelines in the United States. However, numerous private companies are evaluating the concept and developing models. In other words, rather than being defined by the government, the criteria are more likely to be determined by the industry itself.
Only Mexico and Brazil are making headway in the formal regulation and promotion of Open Banking in Latin America. They are, however, still a long way from what is happening in Europe, the United Kingdom, and the United States.
Mexico, which has over 400 Fintech enterprises, passed the Fintech Law three years ago. Its article 76 controls the subject of Open Banking precisely and stipulates that all financial companies are required to exchange information via APIs. However, there are still delays and unknowns when it comes to implementation.
Brazil, for its part, announced this year the implementation of Open Banking regulations, which would include four stages: product and service information; customer information; transactional information; and payment and shipping information for credit transactions.
Chile is being confronted with a variety of security and financial architecture concerns. Experts predict that the Financial Market Commission will first create a general regulatory framework that will be ready in one to two years.
In Argentina, Open Banking is still in its early stages, but there are various signs that it may become a reality in the future years. For example, banks currently provide APIs to businesses in order for them to link their systems and automate activities. There are also virtual wallets that concentrate information and transfer it to entities via APIs.
What are the benefits of Open Banking?
Open Banking creates new business prospects for individuals and businesses by transforming the old offering into a more creative digital offering centered on the customer.
Multiplica has identified five significant benefits of incorporating Open Banking into the business plans of banks and technology companies:
1. More relevant and tailored experiences
Users desire fresh services and pleasant experiences to satisfy their demands. As a result, the usage of massive volumes of data enables the creation of omnichannel and personalized solutions that are tailored to each client.
2. Better use of time
Users can make better use of their time thanks to new technology and applications. Because financial information is available digitally, the approval procedure for credit, for example, is drastically cut from several days to only minutes.
3. More active clients
Financial institutions can meet the requirements of their existing clients while also attracting new ones. This is accomplished by utilizing massive volumes of data to offer solutions and services personalized to consumers who are still outside the ecosystem.
4. Towards real technological transformation
Tools like Machine Learning, Artificial Intelligence, and even microservices push financial institutions to embrace more and better technology, which promotes modernisation.
5. Encourage financial inclusion
API development allows financial organizations to expand and improve their offering of financial services and products. As a result, personalized solutions may be developed for unbanked persons, SMEs, or businesses that do not have access to financial services, based on their requirements and capabilities.
Multiplica specializes in developing meaningful experiences for financial institutions. If you are eager to learn how we can assist you in implementing a successful Open Banking strategy in your organization, we invite you to contact Gerardo Barbosa, CTO at Multiplica.