In the 2018 edition of the Innovation in Retail Banking report, Infosys Finacle and Efma reviewed a decade in banking innovation.
Regulations, when banking was in the throes of the recessionary crisis, focused on safeguarding the taxpayer and the economy by mandating banks to hold more capital against their risks. Even before the crisis, regulations in banking always focused on mitigating risk.
From then to now, in just about 10 years, mandates seem to have evidently shifted from capital regulation to innovation. In sharp contrast to expensive closed door innovation and limited discretionary spend due to high regulatory costs, open innovation is now fast becoming the norm.
Regulations in several countries have brought in open banking reforms with the objective of providing customers more control over their finances, amongst others. In January 2018, the Competition and Markets Authority (CMA) in the UK rolled out the open banking regulation mandating the country’s nine biggest banks to implement open banking standards to improve industry competition and foster customer-centric innovation.
In addition to the scope of the Payment Service Directive 2, the broader legislation in EU, the mandate requires banks to adopt and maintain common API standards, read/write API specifications, and more third-party access to current account data.
Regulatory action has moved eastwards rather fast with nearly concurrent developments in Singapore and Hong Kong. Association of Banks in Singapore has published the API Playbook developed in consultation with the Monetary Authority of Singapore (MAS).
In Hong Kong, the Monetary Authority has published its Open Application Programming Interface Framework to deploy open APIs. And India has by far the strongest growth story in the payments space with its Unified Payment Interface for real-time payments.
At the heart of all these regulations, enabling innovative propositions and business models are simple lines of code—the APIs. Here, we look at some of these new API-driven models and propositions:
The above models make it sufficiently clear that banks need to take a more business-centric look at their APIs. But there’s more to it. Banks need to look at their systems, processes, and applications as business enablers to ensure they are conducive to the open world of banking.
Compliance and regulatory mandates apply not only to transactions with one bank but to all the banking relationships of a customer. Banks need a core banking system built for these open banking realities.
They need a system and application architecture that allows the free movement of data efficiently. Open APIs present a unique and extraordinary opportunity for banks and financial service providers to monetise functionalities and innovate business models that were not possible until a couple of years ago.
While the challenges of interoperability due to the absence of a global standard for APIs may persist for some time to come, banks must align and transform their systems and technology architecture to be able to capitalise on new opportunities and innovate fresh possibilities.