Tony Reid

Implementing Open Banking APIs, PSD2 and More

Blog Post created by Tony Reid on Jul 21, 2017

European banks will need to have Open Banking APIs in place by January 2018.

This whiteboard video explains how to enable your API platform and keep existing systems safe.

 

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Open banking APIs have become a financial services industry hot topic, thanks to two regulatory decisions.

The first is in the UK, where the Competition and Markets Authority (CMA) started investigating competition in retail banking. They produced a report last year which proposed several recommendations and requirements.

A principal recommendation was to improve competition in retail banking. To achieve this, the CMA decided traditional banks should expose their customer data to third parties that would deliver additional retail banking services.

In parallel with the CMA, the European Commission started its second review of the Payment Services Directive. That review also proposed that banks, with customer consent, should expose customer data to third parties, who could then potentially deliver superior services.

 

Four challenges of implementation

 

From talking to our existing banking customers, we have identified four challenges of introducing an open banking API.

The first is being compliant in time.  These are requirements from the CMA and a directive from the European Commission. The API need to be in place at the start of 2018, which leaves banks little time at this point.

Second is improving customer experience. Retail banks across Europe are increasingly focused on delivering new and improved customer experiences.

Third is competition. The principal aim of introducing open banking APIs is to allow other service providers to utilise the data, then offer new and improved services to retail banking customers.

Finally one that doesn’t come up very often, but we think is important, is the operational risk that building and exposing APIs places on traditional systems.

 

Typical existing core systems

 

No bank started life as they are today.  The majority have built up core systems over many years through mergers and acquisitions. Furthermore, they’ve delivered lots of different services over those years too.

Those systems as a result have become interlinked, inter-joined, and incredibly complex. They are traditional architectures and they scale up.

What I mean by scale up, is that if they run out of bandwidth to deliver new services, that is fixed by installing and implementing a bigger system, or a bigger storage device. Scale up systems are capital intensive and take time to become productive.

We should consider how existing systems are managed and changed. Due to the complexity, banks must make sure that those systems are reliable and secure. To achieve this, they wrap rigorous change control and management processes around the systems.  As a result, any major change, which exposing these APIs certainly is, equates to a substantial risk.

There is one other aspect that’s worth considering too. Banks know how many transactions existing core systems need to process.  By opening this API, that becomes unpredictable. The volume and shape of the transactions that those APIs will generate, is difficult to predict.

 

Database extension alternative

 

Instead of using existing core systems, our view is that most banks will build a database extension or caching layer. In this alternative when a customer consents and the bank exposes their data to third parties, banks will extract that data out of their existing core systems, transform it for the new style database, and then populate the database extension with the data.

This alternative provides several benefits. First, banks can quickly become compliant and provide open banking APIs. This solution will scale out, so as banks add more customers to this process, they can scale easily.

More importantly, expect forward thinking banks to use the API to add new services. Potentially they will start to incorporate lots of different data sources. Not only traditional data, but geospatial data, weather data and social media data too.

This would enable banks to deliver a rich set of services to their existing customers through the open banking API and potentially monetise them.

 

Moving data from existing systems to the new database

 

Most banks will have several tools which extract data out of systems and populate business information systems and data warehouses.

Extracting data from traditional systems, transforming it and blending it so that you can use it in these new, agile scale out systems however requires something different. A lot of older tools, which have been very good at doing extracting data, aren’t effective at new style transformation processes.

One tool which is effective at this is Pentaho, which specialises at transforming data from traditional sources and then blending different data sources so that they can offer a richer set of services.

 

Monetizing the API layer

 

Regardless of the approach a bank takes, it will need to support open banking APIs from the start of next year. This leaves little time to become compliant and because that’s just a cost to them right now, we do believe that quickly the more forward-thinking banks will want to extend the capability of those open banking APIs, to develop new revenue streams and monetise them.

We at Hitachi think this is an exciting time, not only for fintech start-ups but traditional banks too, who through these directives, have been given an opportunity to deliver something new to their customers.

 

If you would like to learn more about how Hitachi can help you introduce Open Banking APIs get in touch with via LinkedIn or learn more about our financial services offering here.

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