From Open Banking to Open Finance

From Open Banking to Open Finance

by Patrick Lastennet, Director Enterprise at Interxion: A Digital Realty Company

When Medici Bank was founded by the Medici Family in 1397, banking models were simple – they looked after your money. However, since then, the banking industry has evolved from just a safe space for your money to a drastically more modern, complex, global and technology-driven banking model.

 

What is open banking?

Open banking is the latest stage in this evolution. Founded on the principle of empowering the consumer, open banking has made customer data more readily available to third parties which has subsequently allowed cloud-adopting traditional banks and cloud-native fintechs to build personalised financial services and products that dramatically improve the customer experience. Take financial comparison websites for example. By granting these websites secure access to certain information on consumers’ utility bills, credit cards and banks accounts, they’ll be able to quickly spot where consumers could potentially make savings and even recommend switching providers if it means they’ll get a better deal.

So far, the uptake has been staggering. In January this year, the UK’s Open Banking Implementation Entity (OBIE) – which sets the standards for the secure APIs and ensures the effective implementation of open banking nationwide – published its latest data on open banking adoption across the UK. Today, approximately three million UK citizens and small businesses are active users of open banking-enabled products. The ecosystem is also thriving, with more than 300 firms active in the market and an additional 450 in the pipeline.

This surge in demand for open banking has largely been driven by two key factors. On the one hand you have ballooning consumer expectations. Consumers now want personalised, lightning-fast banking services which technology service providers – such as fintechs – can build with secure access to their data. And on the other, you have impending regulatory changes that traditional banks will have to adhere to in order to legally operate in the UK.

At a glance, it looks like the incumbent banks are at a steep disadvantage and the agile fintechs are running away with the competition. But that’s not actually the case – the incumbents are catching up and they’re doing it through the adoption of hybrid IT. By leaving their legacy IT behind, upgrading their infrastructure and leveraging technology such as cloud computing, banks are unlocking the ability to compete with the more agile technology providers. Hybrid IT is essentially enabling incumbent banks to become curators, empowering them to cherry-pick the third-party products and services they wish to onboard and add to their centralised platforms – building their own connected community.

The benefits of hybrid IT adoption are already apparent. Traditionally, fintechs and technology providers have always had the edge from an API performance perspective, able to meet and even exceed the benchmarks set by the OBIE easily. Recent research from API provider Yapily shows that challenger banks are setting the pace, with Revolut and Monzo hitting 57ms and 211ms respectively, well under the OBIE-set benchmark of 750ms. Conversely, incumbent banks have had a more challenging time, having had to contend with the sheer scale at which they operate. However, slow and steady wins the race, and thanks to hybrid IT, incumbent banks are well on their way to narrowing the performance gap even further – the leading incumbent bank Natwest is currently sitting around 307ms by comparison.

While more work needs to be done to narrow the gap, the next step in the open banking journey is looking increasingly realistic by the day. That next step is open finance, a financial system that promotes and facilitates the sharing of data on a much deeper level, one that puts the consumer first and supports the development of hyper-personalised products geared towards optimising – not improving – the customer experience. However, if we’re to make this dream a reality, there are broader infrastructural challenges that both incumbent banks and fintechs will need to address and overcome beyond API performance.

The rate at which data is proliferating is unprecedented, largely due to the global health pandemic and surge in demand for digital services. According to Digital Realty’s Data Gravity Index, the volume of enterprise data being created, aggregated and exchanged among European cities is the largest in the world; even larger than North America, making the region the world’s ‘enterprise superpower’. This is largely a result of the region’s pre-eminence in a wide range of knowledge economy industries, such as financial services and complex manufacturing, combined with its affinity for data-led industries more generally. However, the report also revealed that the amount of enterprise data being created, processed and stored is slated to reach quantum levels by 2024, inevitably overloading businesses and hindering them from being able to draw out valuable insights from the data. Such proliferation of data also raises concerns about security. As sensitive information holders, banks are ultimately responsible for ensuring that any customer data they provide access to is done so safely and securely. If they don’t meet these obligations, the sanctions imposed by the regulators can be severe; whether it’s substantial fines or halting operations completely.

To address both these issues, banks are turning to cutting-edge technology such as artificial intelligence (AI) and machine learning (ML). Both these technologies have the ability to capture, aggregate, process and draw insights from enormous volumes of data in near-real time. They are also being used to underpin the next generation of proactive fraud detection techniques. However, advanced technology needs advanced infrastructure to function optimally, and as it currently stands, incumbent banks aren’t quite there just yet.

But we’re here to help. We have the solutions and expertise to accelerate incumbent banks’ move to hybrid IT and narrow the gap with technology providers even further. Interxion’s Data Hub solution, built on PlatformDIGITAL®, our global purpose-built solution to tackle the business challenges of today, allows businesses to deliver mission critical insights quickly through localised data aggregation, standardised storage and optimised real-time intelligence. With our flexible infrastructure solution, users are able to deploy, connect and host critical data infrastructure in close proximity to a whole host of connected communities – from public clouds to other users – helping to simplify connectivity, cut costs, address data gravity concerns and allow banks and technology providers to remain compliant with data legislations, such as PSD2 and GDPR.

Open banking is still very much in the embryonic stage of adoption. However, the progress the industry has made so far – particularly in the UK – has been so significant that regulators and the financial services industry more broadly have already laid out intentions for its future: open finance. However, to support this future, banks and businesses alike need to further embrace hybrid IT and rearchitect their digital infrastructure so that it’s fit to function in the digital world. Incumbent banks have a golden opportunity here to propel the industry forward and use their scale for good. Our deep-rooted heritage in helping businesses navigate the challenges of today; whether it’s data proliferation or digital transformation, means that incumbent banks can benefit from a range of innovative products and services, which will enable them to embrace the future of finance with open arms.