Why Open Banking is Helping Progressive Financial Services Companies Grow and Prosper

  • Martin Gaffney, Vice President - EMEA at Yugabyte

  • 13.12.2022 11:15 am
  • #OpenBanking

Database specialist Martin Gaffney hopes the sector recognises the value that Open Banking has added and how it helps companies better manage complexity

July 2022 marked five years since the beginning of API specifications for Open Banking. At the time, the financial services sector was broadly unimpressed, as they considered Open Banking a hurdle rather than an opportunity.

Today, it seems clear that the sceptics were wrong. In May 2022, the UK open banking community made a record 1 billion API calls. There are now 336 regulated providers of Open Banking-based services in the market, 246 third party providers, and 90 account providers. This shows what a buoyant ecosystem Open Banking has contributed to.

Open Banking wasn’t a restrictive move by regulators, in fact, quite the opposite.

It showed that working with APIs  opens up opportunities rather than creating constraints. Accepting this reversed 20 years of strategic thinking in the UK banking sector. Previously this had centred on disintermediation, i.e., that the value-add was owning and running your own supply chain

The end of ‘disintermediation’?

Management consultants told us that brands needed to reduce complexity by bringing the supply chain in-house. This was a warning that made sense when Tier 1s and 2s were building their own websites, and banking applications were running off their own mobile solutions.

At this time, the end goal was owning every online banking touchpoint, from the mobile end to the payment back end.

However, managing the entire journey came at a cost; complexity. Bank CIOs quickly learnt that to write a new web page, all the right links had to be set up for it to talk to an application server, which needed to talk to the right database (which lived, of course, in that expensive on-prem glasshouse).

When you own everything, everything is your problem, from start to finish. That means having to pay for all sorts of developers with overlapping skill sets to maintain your  tech stack.

Open Banking changed this. Welcome to a new era, that of ‘de-disintermediation.’ It means we all need to work in a different and far more open way.

This is because being adept at exposing and consuming APIs is now the minimum requirement for modern online financial services. You need the right skills and tools in place to support modern banking software.

Open Banking means allowing a third party to enter the application server layer

Consumers don’t care about your problems,unless they are impacted. All they want is an easy-to-use mobile banking app. Part of that CX is the ability to bring all their accounts together in one place. This kind of embedded banking is how many new payments brands work. This spawned the explosion of FinTech.

Services like Buy Now, Pay Later and transfering money with just a swipe of your thumb make sense to the digital native. Customers expect this level of services and connection, so you need to meet their needs, de-disintermediate, and adopt Open Banking. Doing this won’t just make your customers happy. It will also make your life easier.

To support Open Banking, you must build apps in a way that permits third parties to come in at the application server layer.You must also allow the other party’s application server to talk to other application servers, all of which have databases at the back end. This is where the API absolutely comes to the fore.

In fact, the smart and relevant financial services CIO welcomes widespread use of APIs, which makes it simple for two pieces of software to talk to each other.

Even better, they do so via a form of software ‘contract.’ A commitment to deliver a service that allows someone to access their bank account and returns their statements or their latest transactions.

With this modern digital banking, you must give me what I need, and this all happens in one agreed format, e.g., JSON, JavaScript Object Notation, etc.

The brands who will succeed in an OpenBanking/de-disintermediated/API-centric world are those that build their processes, skill sets, tools, and architectures in a way that embraces this way of working.

They need to do this because Open Banking unlocks business value. APIs allow you to expose data to the web and gives chosen partners access, adding value.

It could also speed the decline of those huge monolithic banking applications originally set up to do digital banking. Developers now routinely break the front off and replace proprietary apps with APIs.

The future is app modernisation and microservices

Why? Because moving to an API-based model allows you to outsource the value of your back end, even if that's still locked in a monolithic mainframe app in your data centre.

Indeed, with APIs and with cloud, two separate tech and business development threads dovetail perfectly: app modernisation and microservices. These bring everything to do with data as close to the customer as possible, around the world.

Open Banking started as a push to allow more competition in the market, but has shown that the API is the best way to comply with regulations and solve technical debt issues.

As you start on the path to de-disintermediation by breaking up your big banking systems, you're also breaking your data up. You can’t just stick with the tried and true (and expensive to run) monolithic database on the back end. Your on-prem monolithic proprietary databases never integrate well with cloud and microservices.

The best decision is to move to the modern data layer, an intrinsic piece of this microservices architecture. For this, consider the YugabyteDB distributed SQL cloud database (for example), which gives you huge operational, development, and support advantages.

Given all it’s done for the sector, let’s raise a glass to Open Banking, which unlocked the door for many financial services firms to access business value by setting up a supply chain that they no longer need to 100% own.

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