The open banking toolbox is being left on the shelf, says Stephen Walsh, Sensedia’s Director of Sales for EMEA. Beyond compliance, many banks still haven’t grasped its full potential.
And, surely, when a bank commits to a new IT development there must be a good strategy behind it? Well, apparently not always when it comes to the adoption of application programming interfaces (APIs), a key element of open banking.
Brazilian software firm Sensedia still encounters bankers who invest in them purely to meet regulatory demands or, worse, just to tick a box.
“We’ll be told ‘yeah, we’ve done open banking, we’ve got it, we’re there’,” says Stephen Walsh, Sensedia’s director of sales for Europe, the Middle East and Africa.
“If I hear this, my next question is how much money are they making out of it? APIs are supposed to be a technology initiative that allows firms to reach new customers with new products, but some banks are doing none of this.”
Sensedia is a developer of tailor-made APIs for clients in the retail/e-commerce, insurance and banking sectors. In its home market of Brazil, interest in them is growing fast, given the country’s aim to finalise open banking legislation later this year, after two years of work overseen by the country’s central bank. Open banking partnerships between fintechs and banks already exist there, but industry participants have been asked to help mould how the system should formally operate going forward. The course being taken is similar in nature to the UK’s Open Banking legislation and the revised Payment Services Directive (PSD2) for the European Union. But Brazil will also employ a phased launch approach, as adopted in Hong Kong.
Sensedia already has banking clients in Brazil – such as Banco Topázio which sells forex services via 80 fintech third parties, and Portocred, which offers white-label credit services via retail partners.
Walsh was hired last year under the company’s international growth plans to steer sales in EMEA – and he says nailing down a bank’s strategy is vital before an API plan can be formed.
“It’s about us really understanding the customer’s business,” he says. “It’s easy to say ‘the customer’s business is banking’. Yes, we get that, but we must drill down. What are they trying to achieve? What is the five or 10-year plan? Then, and only then, can we move forward with a technology strategy.
“We need to know the business drive, because without that no one will pay for the investment needed, plus the chances of success are far lower. Having open banking APIs for regulatory compliance is fine, but what happens when you stretch the boundaries a bit? What if you embrace more change?
“The key is to get business more involved in open banking. Talk to the product owners in the banks – whether that be insurance or wealth management, we want those people to say ‘I want my products and services to be more accessible to my bank’s customers, or to my third-party partners’ customers‘.”
Access all areas
So that a customer can develop its strategy, Sensedia employs what it calls an open banking playbook to guide and suggest use cases. Security is clearly an important component of that when considering how data can be shared, subject to legislation such as the General Data Protection Regulation (GDPR) covering customers in the EU, and understanding permissions. Sensedia has templates to help explain and implement security through the API lifecycle.
Walsh says: “Because banks are indeed opening up their systems, security’s got to be paramount. Banks must consider who can access what data, where and when, and also make sure that the data owner – and, under GDPR, the data owner is key – has the ability to accept or decline data sharing.
“So, we’re trying to help banks not only embrace a whole API strategy, but also merge that into their security offering as well.”
But improved sales should be a motivating reason for adopting the open banking model – sales of your own products or the ability to sell a third party’s – says Walsh. And there can also be value for a bank in opening up its customer base to others.
Walsh says: “Any time you do something new there is a risk; whether that’s putting in a new IT infrastructure, or moving from a traditional core banking platform to an open banking environment. You need to understand those risks and manage them. But banks must consider, if they don’t move forward, where they will be in five years and who will have leapfrogged them.”
Good for business
Walsh acknowledges that open banking demands a mind shift.
“Sometimes, it’s difficult for banks to understand that it’s a two-way thing. It’s not just the bank selling its products to new people; it’s a bank selling someone else’s products to new people, or indeed to their own customer base.
“For example, a bank may need a quick and easy credit application. How does it do that? Does it build it itself? Or does it partner with someone else? If taking the second option, APIs and an open banking infrastructure will reap rewards.
“To grow as a bank, you either acquire new customers or sell your existing customers new products – or maximise your return from either or both of those things. And APIs help banks to do this in a much more agile fashion than in the past. If we’re looking at people banking via an app, banks can say ‘here are some new products. Let’s test them out on a small subsection that we think, demographically, might be the early adopters for this. Let’s understand whether they are willing to be part of this experiment’.
“Banks don’t want churn of customers, and if they have the ability to offer new services to those existing customers it clearly reduces the risk of churn. But it also increases the potential benefits of selling those customers new products, new services, and making their experience more delightful.”
Walsh points out that those two clients in Brazil – Portocred and Banco Topázio – ‘really started from nothing’ but grew fast due to their clear strategy of selling white-label banking products via third parties.
“By sharing its data, Portocred white-labels loans to other customers and so reaches parts of the market they couldn’t reach themselves, but it doesn’t take away from their own customer base,” he says. “And Banco Topázio makes its data available to 80 fintechs, which are effectively reselling their forex services. So, the fintech doesn’t have to build a forex service, it’s already there from Banco Topázio, and Banco Topázio doesn’t have to find 80 retail partners. It’s a real win-win situation.”
Data is another motivator for API adoption, says Walsh, with banks getting more from their artificial intelligence if it can trawl through a bigger pool of information on customers. Although an established bank’s data will be rich, given that customers often remain with a bank for a lifetime, it will have little or no insight into the financial products a customer buys from other providers. And the in-house data held by rival banks may be very similar.
He says: “If banks partner with other organisations, that just enriches the data pool. If I’ve banked with HSBC for 30 years, then HSBC knows my salary, etc. But it doesn’t know about the insurance purchases I make, about any third-party loans I take out, or financial instruments I’ve bought elsewhere. Imagine now, in an open banking world, this data can be shared among different vendors, if the customer allows it. Then the richness of that data allows a bank to make a far more targeted approach to a type of customer.
“Using this new technology, it’s much quicker for banks to make that offer. Before open banking, marketing was largely done by mailshot. I don’t think the new generation of bank customers are interested in something coming through the post. But this new targeted approach is better for the customer, and banks can quickly test what works and what doesn’t.
“Returning to my original point about strategy, I said banks needed to ask ‘what is open banking doing for me?’. If they can harness data in this way, open banking can help them make huge progress.”