Open banking promised to democratize access to banking data and payments. It welcomed new players to unlock the potential of banking APIs to offer customers innovative solutions and more choices. Despite the noble intentions of the regulators and a framework for enabling the change, the current state of the open banking ecosystem has not yet fully lived up to the expectations.
The PSD2 regulations and various other open banking initiatives across the world have divided the banking industry in two. On the one hand, we have banks proactively expanding the API services offered to third parties and attempts to create marketplaces promoting partners that are part of this ecosystem. On the other hand, other institutions are still making it hard for third-party providers (TPPs) to use even the basic compliance APIs.
This is due to low-quality solutions and poor documentation, followed by discrepancies between sandbox and production environments. Some banks chose to limit the data available in their online banking systems in order not to have to share them in Account Information Services interfaces. Leaving aside the judgment of such practices, let’s take a moment to think which approach is better for banks and their customers in the short and long term.
Open banking: a lot of fuss about nothing?
In October 2021, Anne Boden, the founder and CEO of Starling Bank, caused a heated debate on the status of the Open Banking Initiative in the UK. She claimed that it had been a failure and it did not result in an increase in account switching. She also questioned the business models of fintechs accessing data. Her opinion met with disapproval from fintechs and signatories of a letter from the Fintech Founders group who wrote that they “believe that this view is uncompetitive and typical of banks trying to thwart the future of innovation in financial services.” They argued that “the implementation has been far from perfect, and there are challenges — but we are still in the early stages of the journey.”
Irrespective of whose arguments are right, there are no doubts that the current state of open banking is not satisfactory.
The lack of a common standard for APIs published by banks and often cumbersome authentication processes don’t make it easy for TPPs to appreciate the new ecosystem.
Aggregators of APIs such as Slatedge and Tink emphasize that there is still a lot to improve when it comes to quality services and ease of integration with many banks across Europe.
Challenges with integrations were also given as the reason for the pivot from a Numbrs aggregation service into a bitcoin storage vault. The company blamed banks for the situation. In an interview with swissinfo.ch, CEO and chair of Numbrs, Fynn Kreuz, said,
“It should have allowed us to roll out our business by storm. But some banks tried their best to make the lives of third-party providers as complicated as possible and squeeze them out.”
Sabotage or mission impossible?
Were the poor quality of specification, half-baked sandboxes, and missing data a conscious strategy of some banks to make it harder to “steal” their customers? Perhaps the challenge was bigger than expected, with many of them still operating legacy core banking systems. Having personally gone through several integrations with bank APIs, I would say that in most cases it was more due to lack of readiness and the learning curve on how to deliver good DX (developer experience) rather than a deliberate obstruction of access to services.
The most frustrating part of integration with APIs was the lack of responsiveness of Account Servicing Payment Service Providers (banks) to issues raised by TPPs, which often required endless follow-ups and long delivery dates of fixes. For TPPs, working with banks from multiple countries and the lack of a cross-EU API standard for account information services (AIS) and payment initiation services (PIS) was definitely another challenge that added to the complexity of the integrations.
The banks which chose to limit the access to data to an absolute minimum, hiding behind tricks and legal interpretations, were obviously playing it safe. On the one hand, they feared TPPs (including other banks) would pick and choose their best customers and present them with alternative offers to encourage switching accounts. On the other hand, with no formal process nor a universal platform for handling claims under the PSD2 open banking regulations, such an approach might have also been dictated by the need to protect customer data and limit the potential losses from occurring as a result of fraudulent TPP activities. So far, such scenarios have not materialized, but we need to keep in mind that there were many unknowns when the banking industry in the EU started building their PSD2 API services.
Building products for ecosystems
In the long term, such a defensive approach is not sustainable. In order to grow and win customers through innovative solutions, banks need to take a different approach. In this case, the “if you can’t beat them, join them” strategy has much more potential than building walls to protect the customers from moving their accounts to other players.
Banks need to understand that their mobile banking apps that are distributed to customers may not necessarily be the only way users want to interact with their account.
A partnership approach, powered by APIs, will enable such a transition and allow banks to be where customers need their bank to be and when they need it. This way, the financial services offered by a bank can be embedded into an app or service offered by a third party, generate additional revenues, and provide customers with an excellent user experience.
I like how Michael Pierce, Head of Embedded Financial Solutions Sales at FintechOS, puts this:
“An embedded finance offer is to traditional branch-based banking as Deliveroo is to a sit-down restaurant.
Put simply, embedded is about whether you go to the financial institution or whether their products and services come to you.” (source)
To establish a robust ecosystem with strong partners, banks must invest in quality APIs and build secure platforms with developer experience in mind. Although this requires an open approach to banking, in the long term it is going to pay off.
The last thing you want is to have customers switch accounts to your competitor because they made embedding their services to third parties easier than you did. Start treating your developer portal as a way to attract new business opportunities and think of developers as your new clients.