Open Banking: An Important Playground in the Future of Banking
With the increasing digitalization in recent years, the basic experience in banking has been transferred to mobile from physical channels. The customer experience offered in digital today aims to provide service in the applications where the customers currently in rather than their own channels. Thus, the “channel” discourse lost its validity, every place touches the customer has become a point of interaction.
The concept of "Open Banking" emerged when changing customer expectations and inspiration from new technologies combined with the priority of providing customers with innovative, practical and accessible services. In simple terms, open banking can be defined as a banking application that enables banks to share the banking data of customers through APIs [1] with different institutions in order to create a new service thanks to the approval of the customers, and allows different institutions to initiate transactions on behalf of customers (Figure 1). In this structure, customers can access different services of different institutions by giving permission to share data. With this aspect, open banking stands out as an important approach to create new business models.
Figure 1. Access to Banking Services After Open Banking
From Yesterday to Today
Fintechs, which provide services in the field of financial technology, have entered our lives in the last 10 years and have pioneered a faster innovation in the sector. Especially in geographies such as America, Europe and Asia, many companies have started to take a role in the field of finance by focusing on certain areas such as payments. The first open banking applications were also generally seen in the field of payment, and companies such as Sofort began to offer services that are considered within the scope of open banking today before the concept of open banking has not been existed (for example, online shopping payment is made directly from a bank account instead of a credit card). In some countries such as the USA, the development of open banking is driven by innovative players; while in Europe, standards are regulated by regulations to make sector capable of reaching new players to encourage innovation. We can say that Open Banking regulations mainly aim to create a more active competition, support innovation and provide better customer experience in order to increase customer benefit in the banking sector. The PSD2 [1] regulation created in 2015 was a very important step as it made open banking applications possible, and thus, it was aimed to respond to the developing sector and changing customer expectations over the years. In PSD2, 2 basic concepts related to open banking were introduced:
• Account Information Service Providers [2]: Online provision of consolidated information regarding one or more accounts of the user in other payment institutions
• Payment Initiation Service Providers [3]: Initiation of a payment order for the user's account in another payment institution upon request
In order to increase competition, PSD2 made it mandatory for banks in Europe to open their services to different institutions (TPPs) if their customers demand. The main difference of this business model compared to the current structure is that it allows designing services based on data ownership of the customer.
We see that the examples of open banking applications today generally focus on the account consolidation and payment initiation services, which are the basic two building blocks of PSD2. Especially with account consolidation, which means the consolidated representation of accounts in different banks from a single application, it becomes possible to create many additional services. For example; we can say that account consolidation is very important function in order to benefit effectively from the PFM [4] services.
While fintechs such as Mint and Yolt in the USA and Europe give their customers the chance to manage their accounts in different banks from a single platform; banks such as HSBC, Capital One, Lloyds, BNP Paribas have also begun to offer some similar services to their customers. In addition, some institutions cooperate with technology companies that provide infrastructure and solutions like these services. Companies such as Bud Financial, Tink, Plaid, Figo, Yodlee help institutions to offer open banking services faster with the APIs and platforms. Visa's acquisition of Plaid for $ 5.3 billion in 2020, shows how important open banking will be in the upcoming period.
In the meantime, we should point out that open banking is an approach that is not limited to PSD2 and will enable the emergence of new business models associated with almost all banking services beyond account consolidation and payment. A wide variety of services like credit, insurance, deposit, etc., which can be accessed through banking channels today will be available from different channels thanks to these innovative business models. In fact, we can say that open banking regulations are expected in all other sectors with new service models in similar models (via APIs) based on larger data sets.
How Will Open Banking Affect Our Lives?
We believe that open banking will fundamentally affect the way of doing business in financial services and banking, and lead to the emergence of new business models. When we consider the access to banking services from many different platforms, and the opportunities to create innovative solutions and products by combining services in different sectors and banking services with APIs, we may have the opportunity to understand the potential of open banking more clearly. As we mentioned above, this subject will bring innovations in a much wider scope, not just services related to payments.
It is certain that competition with the open banking, which is more widespread and whose standards are determined by regulation, will benefit people who use banking services. The development of more innovative products and services, easier access to services will be the primary advantages for bank customers (both individual and corporate customers). Benefits to be provided with new products and services can be in a wide variety of areas, such as time savings, access to more favorable interest rates, or more effective use of loyalty programs. In addition, the opportunity of using these services with different solutions for those who have not had access to banking services will also increase.
We can say that the competition that open banking will bring to the sector may carry risks such as losing customer relationships and decreasing profit margins for existing banks and financial institutions. However, banks with strong banking infrastructure, customer-oriented services and better digitalization have opportunity to end up with better customer experience and innovation thanks to right strategies. The long-term trust relationship between the banks and their customers is also an advantage, which can make banks the most preferred players for access to open banking services. By designing innovative services thanks to open banking, banks can:
• Access to more data and will be able to get to know their customers better, offer more personalized solutions, and deepen their relationships with them,
• Reach customers from different interaction points through different platforms and applications
Situation in Turkey
We see that there have been important developments in open banking in our country, especially in the last 1 year. First of all, the study of regulatory institutions opens the way to progress in this field and it is not difficult to predict that players such as many banks, financial institutions and payment companies will start to offer similar solutions in a short period of time. Even today, we are witnessing that there are some solutions within this scope.
The enactment of Law No. 6493 [5] in 2013 enabled Electronic Money and Payment Institutions to enter our lives and to form the concept of fintech in our country. With the changes made in the law numbered 6493 in November 2019; "account information service providers" and "payment initiation service providers" are likewise defined as in the concept of PSD2 and the authority was given to the Central Bank of Turkey to make regulations on these issues.
In the 11th Development Plan announced in July 2019, it was stated that the legislation will comply with PSD2 in order to strengthen the legal infrastructure of open banking, and a roadmap for the development of the fintech ecosystem will be created as a support.
Finally, in the “Regulation on Information Systems of Banks and Electronic Banking Services”, it is stated that customer identification can be made remotely and even it is possible to receive services through open banking from a bank where customer has already been identified. In the same regulation, open banking services are defined as follows: an electronic distribution channel through which customers or parties acting on behalf of the customer can remotely access financial services offered by the bank through API, web service, file protocol, or give instructions to the bank to perform banking transactions.
To sum up, we anticipate that with the definition of the standards that will determine open banking practices and the clarification of the necessary regulations, such services will be more widely included in our lives in Turkey. Turkey will make a difference in the world quickly with its young, innovative, advanced digital services and technological infrastructure of prominent banking sector.
Akbank and Open Banking
In order to take advantage of the open banking, we think that beyond seeing this issue as a matter of compliance with the legislation or preparation of a technical infrastructure, there is a need to provide business models suitable for this new understanding to develop differentiated service designs that will create value for customers.
Open Banking activities also started in Akbank 2015 and Akbank API portal was opened in April 2016. We have worked and continue working with many of our business partners over these APIs. Open banking supports our customer-oriented vision, enabling us to interact with our customers outside of our own contact points. Thus, we add new values to the lives of our customers with the collaborations we have established.
Until today, we have provided our innovative services to our customers on different platforms by signing important collaborations with leading organizations of many sectors such as e-commerce, technology, telecom, fuel, ERP systems and HR applications.
We consider the determination and spread of the open banking standards will fundamentally affect and change the banks’ way of doing business. With Open Banking, banks will be able to offer a more personalized experience to larger group of customers. From the customer point of view, it will be possible to get more innovative, more accessible and advanced services with a better experience. With these aspects, a widespread and regulated open banking practice will bring an exciting new era to support our customer experience-oriented vision and strategy as Akbank. For this reason, we expect that Open Banking will bring new opportunities and enhanced experience through effective collaborations to be established rather than a legal adjustment process or threat.
With new data sources, banks will be able to improve their analytical capabilities and models. With these developments, we believe that banks will identify the needs of the customers in advance and offer them proactively more innovative and personalized products determined with more accurate criteria rather than traditional products.
As Akbank Lab Innovation Center, it is exciting for us to support the work done in this field which is very important for the future of banking by working closely with both our business units and our information technology teams.
[1] Application Programming Interface
[2] Payment Services Directive 2
[3] AISP: Account Information Service Providers
[4] PISP: Payment Initiation Service Providers
[5] Personal Finance Management: Personal Finance / Budget Management
[6] Law on Payment and Securities Settlement Systems, Payment Services and Electronic Money Institutions
