According to Bank of Ireland’s head of payments, Vincent Brennan, the next revolution in banking has already begun.
To the average consumer, terms such as fintech or open application programme interfaces (APIs) don’t mean a whole lot. But the relationships between consumers and their banks are about to be changed forever through open banking.
It seems like a distant memory that the only interface banking customers had with their bank was at the end of a long queue in a branch, or being summoned for a ‘friendly chat’ with their bank manager.
‘There is a theory that PSD2 will lead to the disintermediation of banks. But if you do nothing, that is exactly what is going to happen’
– VINCENT BRENNAN
But today, most consumers’ interface with their bank is online via the web or through apps.
And now, through the advent of APIs, how consumers view banking is going to be irrevocably transformed.
The best analogy for what is happening could be the metaphor of the launch of the App Store by Apple in 2008. Until then, buying and installing software out of the box was a physical process. Then apps came along, and software can now be installed on our devices in the blink of an eye.
This transformation continued, as software developers began to use APIs to allow web services and apps to openly talk to each other, fuelling the perfect storm of services that range from Uber to Airbnb, Spotify, Facebook and countless other services that feature in our digital lives in the second decade of the 21st century.
And the latest industry to be swept along by this ‘open’ revolution is the banking sector.
The new world order of banking
The advent of APIs in the fintech world is powering a new range of services that many of us are beginning to adopt. For example, APIs made available by Barclays are enabling players such as Circle to provide peer-to-peer payments to smartphone owners in the UK, Ireland and Spain.
Neo-banks such as N26, Atom, Starling Bank and others are, in some ways, becoming the new face of frontline banking services on mobile devices.
Crucially, open banking enables banks to put the customer at the centre of their future strategies, driven by the fluidity of APIs and processes such as ‘know your customer’ (KYC), which give consumers greater power over their personal data and financial assets.
At Bank of Ireland, the head of group operations and payments, Vincent Brennan, is a leading international force in how banks are responding to this challenge and opportunity.
Brennan is deputy chairman of the Euro Banking Association and chairs the organisation’s working group on open banking. The group has just published a new paper looking at all the various layers of open banking, including APIs and blockchain.
“From my perspective and the perspective of the working group, ‘open banking’ is a term that is still under development. But in the 18 months since we began focusing on it, open banking as a change agent in banking has morphed exponentially.”
Brennan said that among innovation leaders at banks around the world, the potential of open banking – where banks collaborate with each other and with new fintech players via APIs and blockchain – is significant.
But at the heart of it is the customer, who now has the opportunity to shape their banking services around their lives.
“It brings challenges that are important; how banks can share their data in a standardised and secure way, how customers can choose us to use financial data security, and how banks and fintechs can integrate banking into contextualised propositions.
“What open banking does is enable fintech start-ups to integrate transaction banking into these propositions that they are developing. Some of these are financial services-oriented, some are all about mobile commerce. But for me, it is a movement that bridges the two worlds of traditional banking and fintech.”
The context of PSD2
According to Brennan, the forthcoming Payment Services Directive 2 (PSD2) creates a vital context for open banking.
PSD2 will break down the bank’s monopoly on their user’s data. It will allow businesses such as Amazon to retrieve your account data from your bank with your permission, for example. PSD2 will also require stronger identity checks when paying online.
“Under PSD2, banks have to open up or provide access to accounts through a dedicated interface like an API that will allow third-party fintech players or other banks to provide services. It empowers customers to authorise third parties to access their accounts and serve their needs.”
Brennan said that until PSD2, there had been no real regulatory framework for open banking.
“The European Banking Authority is working out security and anti-fraud standards to accompany this whole new world.
“It’s happening really fast and interestingly, people are willing to provide tech giants like Apple and various app platforms access to their accounts to pay for things.”
Brennan said that 2018 and 2019 will be pivotal years for this new world order of banking services. “But banks need to think beyond what they have to do and figure out what the opportunity is for them.
“They need to think about APIs as a channel in their own right and how they can enable faster development within their own institutions, provide customer with better experiences, and embrace new business opportunities just as other industries have done through the app market, like transport and travel have done.
“APIs enable us to much more easily link a fintech proposition with a banking proposition, and thereby provide a richer experience for customers.
“In some cases, a fintech start-up may have a great proposition but no market and no KYC legacy; the bank knows the customers, has the KYC legacy, but perhaps less bandwidth to do the innovation or development that the start-up has.
“So, for the banks, it promises greater opportunities to innovate than before, in partnership with nimble new players. There are huge opportunities in this for traditional banks.”
Brennan explained that in the UK, driven by banking regulations there, Bank of Ireland has already launched its first API service, a kind of find-your-ATM tool.
“It enables web developers to come along and leverage these bank APIs. In the coming months, you will find banks publishing more and more APIs into the marketplace as part of this journey.”
I ask Brennan if it is possible that the open banking revolution could compromise the banks’ traditional role in society.
“It is evolution. Banks will evolve and be able to serve their customers better. The branch will become more of a place for advice and self-service, but integrated as part of the wider digital world. What open banking and open APIs enable is for people to integrate transactions into their lifestyles, whereas, in the past, people used to have to take time out from work or life just to go to the bank and get money.
“Open banking doesn’t spell the demise of the bank; if anything, it enhances its role. What it does enable is choice for consumers, in terms of how they consume and pay for services.
“We are still investing heavily in our branch network, but in a very different way, as you can see from the new StartLabs and Workbenches. The bank will always have a place in the community. The core difference is that people want choices and they want their banks to be able to interconnect with the services they want to use.”
Brennan said that the Euro Banking Association will be holding its 12th annual conference in Dublin on 20 and 21 June, and the subjects of PSD2 and open banking will be top of the agenda.
“Yes, there is a theory that PSD2 will lead to the disintermediation of banks. But if you do nothing, that is exactly what is going to happen,” he concluded.
“If you innovate and get into the game, there are huge opportunities and it is highly exciting.”
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