President of Technology and Chief Technology Officer at Okta.
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Open banking is leading the way for collaboration and data sharing among the banking and financial industry and will ultimately help drive the financial ecosystem to evolve into an open finance and an open economy environment. As I stated in my last two articles on charting the course to an open economy, it really is about true innovation and differentiation, which allows consumers a better way to bank, manage finances and engage with their financial institutions.
As a recap, open banking allows banks to share customer data (with their consent) with third-party providers via APIs through a unified dashboard view of all interconnected banking services. This enables users to make quick, secure payments and/or access banking services directly between service providers—which then allows a frictionless, secure and streamlined way for consumers to access their financial information.
What Is Open Finance?
The natural and progressive step in an open banking ecosystem is the ability to open it up to an open finance model. It essentially extends the scope of open banking to all financial data. This means that it is no longer just the banking applications that can be used in a unified dashboard but rather allows consumers to see a more holistic view of their financial footprint in one place, such as mortgages, insurance, asset management, savings, credit card spending, pensions and more.
Having an open finance ecosystem would allow consumers to gain access to a much larger range of financial products and services and have greater control over all aspects of their financial data. But how do banks and financial institutions get started? There are essentially three business models they can offer.
• Distribution: This is the most common model in which banks can offer an open API and expose assets to third-party developers to create an ecosystem of apps that can be connected to bank assets. They can then partner with fintech companies, revenue share and provide a great end-user experience to the customer.
• Marketplace: Banks can also reconfigure, distribute and bundle external financial services by developing their own app. Although APIs can allow banks to connect to other financial service providers, if they have expertise and competencies in certain products, they may decide to develop their own app to source and offer products and services.
• BaaS (banking as a service): Banks can also offer white-label banking services via APIs to fintechs and corporations. This is known as BaaS, which enables non-banks to accelerate their digital strategies in open finance by being able to go to market quickly and integrate financial services into their customer engagement platforms. This is also known as embedded finance, and over time, the connection between FI and non-FI ecosystems will create an “internet of finance” as customers gain control over all their data, financial, and non-financial information
Certainly, banks and financial institutions will need to determine what model is best for them when considering how to chart their journey in the open banking, open finance and open economy world. Modernizing infrastructure to support these models will be an important first step to an API-empowered infrastructure.
The Importance Of Securing Data Access And Identities
Because the market is constantly shifting and customer expectations are changing and increasingly becoming more demanding, open finance allows innovative businesses to leverage customer financial data with consent to develop innovative and personalized financial solutions.
This brings us to another highly critical component of this ecosystem and core to it all—identity, access and data security. Without secure data and identity protection, it opens it up to cyberattacks that can be detrimental to a consumer and financial institution. An open ecosystem such as open finance and open banking requires an effective cyber defense solution that can defend against sophisticated cyberattacks that we have seen happen in recent years. There are solutions out there, such as customer identity and access management (CIAM) solutions, that can help with this and reduce cyber risk to the consumer and financial institutions.
Getting To An Open Economy
Time will tell how long it truly will take the industry to get to a full open economy ecosystem, and there certainly needs to be a roadmap on how to get there. Investments in modern infrastructure will be key in ensuring financial institutions are prepared for the industry’s evolution. Although it’s still a bit further off on the horizon, data access is already beginning to happen across industries. And regulations will continue to drive more development for the open banking, open finance and open banking economy.
One thing is certain: A key underlying component for all of this to be successful is securing the data while offering convenience and streamlined services to the end user. Cybersecurity and securing identities will be absolutely critical to ensure the success of this industry transition so that consumers have privacy, trust, interoperability and protection in all of their transactions.
Now is the time for all banks and financial institutions to understand what infrastructure they already have in place and plan for digital strategies for the future. This way, they will be well-poised to offer innovative and personalized financial solutions and chart their path to this open economy world that we will all be part of soon.
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