In the banking sector, the concept of “open” can seem contradictory. Banks traditionally have a “duty of care” to protect their assets rigorously, as required by regulators and customers. Yet today banks are faced with increasingly complex requirements.
The blending of the financial and technology sectors has created a world in which banks protect our assets, but they are also asked to constantly innovate, create new customer channels or services, and maintain compliance across a changing regulatory landscape. To keep pace and remain competitive, banks must take another page from the technology world and embrace open architectures.
APIs are a mainstay of today’s technology and start-up culture, and they are a primary mechanism for building open architectures and platforms. From Yahoo to Facebook, Google, Amazon and more, industry vanguards and emerging companies alike have allowed third parties to access and build upon their codes and platforms via APIs. While giving peers and, in some cases, competitors “access to the house” might seem counterintuitive, the results are remarkable—continuous, rapid innovation, continued product development, and an open ecosystem of knowledge sharing.
Why open banking now?
From a regulatory standpoint, efforts are underway to make open banking and open APIs standard. For example, in the EU a revised Payment Services Directive (PSD2) was released in 2016 that includes a series of technical guideline and standards for the use of APIs. PSD2 mandates the opening of banks’ APIs to third parties. Countries have two years to make it national law. From that point onward, banks will have roughly 18 months to implement the regulations. We expect to see new processes and software in place to address the regulation in 2019 and beyond.
While this new regulation will serve as a major catalyst for banks in the EU to open their APIs, it is not the only driving function. According to an IDC study from 2016, six out of 10 global banks are open to partnering with fin-tech startups. This shift, from seeing startups as partners rather than competitors, means banks need to find more collaborative ways to work and share data with fin-tech partners. Open APIs facilitate co-development opportunities, data sharing and continual innovation by giving developers on both sides access to data, architectures and code.
How can banks become open and agile?
Banks have historically struggled with the notion of agility. They are built for size and scale, and their architectures and development processes reflect that rigidity. Realizing the value of open banking will only come by understanding and leveraging these legacy architectures with modern tools and approaches, and introducing modern, open solutions and infrastructure can accelerate the adoption of APIs.
The first step towards achieving major advances in open technology and software development is to identify, train and hire the right talent. These people must be capable of delivering daily, in some cases hourly, updates to the technology based on the businesses’ needs—a very different approach from the legacy maintenance models of the past.
Once the right people are in place, a bank should take three steps to achieve an open banking environment.
The first is to use existing infrastructure to create easily consumed APIs for internal purposes. The key here is “for internal purposes.” By taking an inside-out approach, developers engage with the business directly and create working models that map closely to business needs thereby creating “quick wins,” e.g., new analytics portals, cross-departmental collaboration sites, etc.
The second is to build an internal community of developers, programmers and leaders from across functions or business units focused on open banking. Together, this community can work to identify new opportunities for efficiency and collaboration, tapping into micro-services such as DocuSign, which enables electronic signatures, to deliver new services and functionality to the business.
With the internal community in place, it’s time to engage with an external community. This can be built by the bank, or it can be a pre-existing community. As an example, Citi recently announced the launch of its Global API Developer Hub, which gives developers access to build on APIs across eight usage categories. In turn, Citi, its partners and its customers will have access to new services, products and features built through the Developer Hub. Citi is creating an ecosystem of internal and external developers focused solely on updating and building upon its technology platforms—a major advance in banking software development.
Banks are now thinking with a “technology-first” mindset and turning to tried-and-true staples of the technology industry to do that. This is manifesting itself via open banking, which, when adopted with care and precision, as outlined above, can result in smarter, faster development—a definite “win” for banks and their customers.