Digital Banking - Open Banking PDF

Introduction to Digital Banking Enabling Digital Banking BIS521E Mr. M. Mamba  Open Banking Creating an ecosystem of services for customers to manage finances and utilities Goal is to offer customers greater control Using transaction data to access financials ervices...

Introduction to Digital Banking Enabling Digital Banking BIS521E Mr. M. Mamba  Open Banking Creating an ecosystem of services for customers to manage finances and utilities Goal is to offer customers greater control Using transaction data to access financials ervices Open banking Drivers Data Banking Technology When facing disruptive innovations, digital ecosystems are powerful offensive tools.  Open Banking Open banking is the system of allowing access and control of consumer banking and financial accounts through third-party applications. Data is exchanged in the financial ecosystem using application programming interfaces (APIs). APIs is a set of codes which allows two pieces of software to connect to each other for exchanging messages or data or information in a secure standard format. Open banking is a modern legal framework which allows transfer of information related to account for use by customers, financial institutions and third-party providers with the permission of the customer. Therefore, Open banking practices integrate the financial operations of customers by sharing their information among a secured network of financial intermediaries and facilitators.  Open Banking: How it works 1.Banks allow access and control of customers personal and financial data to third-party service providers, which are typically tech startups(fintech startups) and online financial service vendors. 2.Customers are normally required to grant some kind of consent to let the bank allow such access, such as checking a box on a terms-of-service screen in an online app. 3.Third-party providers APIs can then use the customer's shared data (and data about the customer's financial counterparties). 4.Uses might include: comparing the customer's accounts and transaction history to a range of financial service options, aggregating data across participating financial institutions and customers to create marketing profiles, or making new transactions and account changes on the customer's behalf. Open Banking APIs An API is in its simplest form a standardised protocol for computer programs to talk to each other and is integral to modern software development. The use of APIs range from web-based APIs, operating systems, databases, hardware, or software libraries An API specifies the connection mechanism, the data, and functionality that are made available and what rules other pieces of software need to follow to interact with this data and functionality. An organisation can use a public API to allow third parties to access their data or services in a controlled environment. Open Banking APIs Data Transmission: the way the data is transmitted securely. Almost all APIs use HTTP/HTTPS as a transport layer because it is simple and widely compatible, although there are APIs, which can be used over a wider variety of transport protocols. Data Exchange: the format of the exchanged data. The most common formats are XML and JSON. Data Access: access management (who gets access to which data and how is this achieved). There are multiple standards for this; popular ones are SAML and OAuth 2.0. API Design: the way APIs are designed. Common standardised design principles for APIs are REST (Representational State Transfer) and SOAP (Simple Object Access Protocol). Traditional Banking Vs. Open Banking Before open banking practices, banking and financial institutions had their own application programming interfaces (APIs) banks had their own application for customers from which customers used to have exclusive services. The activity of customers was exclusive to the banks and data were collected with the help of proprietary apps of the banks. Open banking has integrated all the APIs as public APIs all the information are available as secured public information and customers can access to their financial products and services by reaching the secured public APIs. Proprietary apps together with third party apps can have access to the information. Banks can interchange the information collected from proprietary apps to public APIs and vice versa. Similarly, third-party apps can share the information to and from such public APIs. Open Banking provides opportunity tothird party applications to serve customers. Open Banking: Benefits to Customers Sharing such information with the consent of the customer allows customers to integrate all their financial privileges from intermediaries and facilitators. Customers can integrate their financial transactions into one platform and enjoy the benefit i.e. customers can look after their account, their financial behaviour, financial products and services available to them, payment convenience etc. Open banking allows customers to enjoy a single view of the entire account. Benefits to Intermediaries Open banking also lets financial service companies use the data shared by the customers and use it for serving their customers. Open banking allows financial intermediaries to assess and evaluate the behaviour of customers and provide the personalized service. Open Banking: Benefits to the economy Open banking is an innovative approach towards banking and it has a lot to offer to customers and institutions. Open banking approach integrates the services provided and makes banking more accessible and flexible. It incorporates and encourages more customers to use financial services. Open banking allows customers to engage more into economical activities as such a banking model integrates customers, financial institutions and third-parties together.  Open Banking API: Benefits to Banking Open banking helps banks to enable higher customer engagement. Moreover, open banking API offers new insights that helps businesses and customers to make decisions about their financial assets. Customer Engagement: Enables customers to engage with their financial data in a secure, agile, and future-proof method with the changing financial ecosystem and customer demands. Payments: Boosts digital revenue by allowing customers to pay through digital and mobile wallets via their smartphones for almost every purpose Banking-as-a-Service(BaaS): Promotes an effective Open Banking API strategy through API- led connectivity by ensuring speed, agility, and innovation Remittance & Currency Exchange: Supports international money transfers and remittances through a simple, faster, and less expensive process with Open Banking API Customized Product Offerings: Benefits customers immensely by allowing financial firms to offer personalized products and services with greater transparency  Trending open banking uses cases Know Your Customer (KYC) process automation: Open banking offers a streamlined process to fetch and verify customer information necessary for the customer due to diligence procedures. Customer onboarding: Open banking offers a simplified customer onboarding process by fetching hard-to-access financial information seamlessly. The customer onboarding process involves account and identity verification, auto-filling forms, income verification, and affordability checks. Financial management: Open banking API offers an optimal digital customer experience by allowing aggregation of financial information from different accounts and banks for easy money management, dashboards, auto-saving, and smart budgeting. Transaction monitoring: Open banking offers enhanced methodologies to improve customer profiles and make it easier for abnormal activity identification or any kind of anomalies in the data. Insurance: Open banking API offers unparalleled visibility of customers’ spending behaviours that results in better decisions for lending and insurance. Payments: Open banking allows a direct account to account payments, eliminating costs incurred by card processors. It further allows the customer to carry out the transaction from a single place. Product comparisons: Open banking platforms and advanced data analytics offers product recommendation service to the customer based on their spending behaviour. Risks of Open Banking Potentially poses severe risks to financial privacy and the security of consumers' finances. Data breaches due to poor security, hacking, e.t.c Misuse of customers private financial data could ultimately raise even greater concerns.  Open banking challenges for regulators Instability of APIs: One of the biggest challenges that third-party providers face is the unreliability of payments. Open banking faces issues with its technical infrastructure most of the time. The instability of APIs further creates friction that results in a negative payment experience. Unresponsiveness of APIs: High volume of calls causes high-reliability issues. Usually, the bank returns an error message when an API goes down, but, most of the time, banks shoot unclear messages such as different types of error code and vague messages. Lack of standards To accelerate progress towards a truly open environment, there should be a universally adopted reference model or taxonomy. Right now every bank is crafting its own API with the help of a leading fintech development company that holds expertise in API development and deployment. But, this limits the openness and defeats standardization The End