Open banking is more than just APIs for banks; it requires the emergence of a digital ecosystem that fosters the active collaboration among banks and fintechs.
For open banking to be usable, banks need to make their data available in the form of secure APIs – then fintechs with innovative ideas will need to connect to those APIs, and leverage the data provided by the APIs.
In our previous blog post in the open banking series, I asked the question: Who wins in open banking? In this second blog of the series, I ask: How do open banking ecosystems emerge and what kind of ecosystem should you strive for?
Open banking ecosystems
There are different types of ecosystems: Imagine a tropical rainforest on one side of the spectrum and a structured English garden on the other. In one, you design and enforce rules – resulting in a predictable but also more constrained system. In the other, you let things emerge organically, resulting in a more prolific, but also more intricate and even chaotic system. When it comes to finances, people tend to prefer the English garden with its predictability and are willing to accept some rules and constraints.
So, for open banking to resemble more of an English garden than a rainforest, you’ll need rules – both foundational and technical rules. What do these rules cover?
Foundational rules for open banking ecosystems:
- First, an agreement is needed on who oversees making the open banking rules. Is it the government or the banking industry? One results in a regulatory approach, the other a market-driven one. A legal framework with rights and obligations of all open banking participants is the basis for both.
- Second, there needs to be agreement on the scope of banking data and functionality to be exposed (payments, checking accounts, transaction data, balances, trading accounts, pension accounts…) and on whether every bank is mandated to expose the data/functionality or it is voluntary.
Open banking is emerging in many countries around the world. The details differ but the above points always need to be covered.
Based on these foundational rules, more technical rules are stipulated.
Technical rules for open banking ecosystems:
- The players in the ecosystem need to agree on technical standards for exchanging data and calling functionality.
- You must ensure that customers stay in charge of their financial data. This means that customers need to be made aware that they are sharing their financial data. They actively and intentionally must consent to sharing their data.
- Sharing the financial data must be secure. This means that the mechanism (API) for sharing the data needs to be secured, all ecosystem players need to be properly authenticated and authorized, and the fintech receiving the data needs to be trustworthy.
- It should be easy for fintechs to figure out how to retrieve the data and use the APIs. Banks will have to provide documentation of their APIs, and straightforward onboarding processes.
For banks to follow those technical rules, they must understand and properly leverage the underlying enabling technology. Universally, APIs are chosen as the technical enablers and as foundation for implementing open banking.
So, to master open banking and create digital ecosystems, banks need to first master APIs.
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