What is the next stage of open banking and how do we get there?

This won’t be the first article you have read about open banking. While many people speculate on what the future of open banking looks like for financial institutions, I think it’s equally or more important to examine the way the industry is going to make it happen.

Open banking and the migration to open finance is all built upon API standards

As open banking evolves, it creates more opportunities for those whose job it is to develop propositions and the customer experience. Technology managers will have a lot more to consider too, and the most successful organisations will be those able to adapt rapidly and launch new technology with confidence.

Before looking at how this complexity can be simplified and controlled, let’s look at where the industry is going next in open banking.

From open banking to open finance

Open banking has enabled consumers and businesses to connect to a broader range of financial products and see their financial status more clearly.

This open technology draws data in from different sources and represents a new way of approaching the management of financial planning, both for individuals and organisations.

There is also more investment in open technology, taking us from enhanced transactional banking to open finance. Open finance is based on data-sharing principles that enable financial institutions to offer a vast range of possibilities to their customers. This comes at a time when the pandemic has changed behaviour and encouraged sceptics to use digital services more.

With open finance, consumers have access to more effective offerings in insurance, asset management, wealth management, unsecured lending, mortgages and pensions. Financial institutions can collaborate with various providers to deliver a wider variety of services based on data and financial messages.

The building blocks of open finance

For years, the payment industry has been fixated by the definition of ‘standards’, which means the data flowing between organisations must be packaged in a similar format. The principle is to ensure the message can be understood and acted upon effectively as it moves between organisations. Essentially, open banking and the migration to open finance is all built upon API standards.

Across the world, different regions have adopted different API standards. In the US it’s the Financial Data Exchange, in Australia the Consumer Data Standards. Open Banking EU and Open Banking UK define the standards across Europe.

These important standards will define the format of the financial messages whizzing around the global economy as they instruct institutions to perform different tasks. They will be the building blocks of new propositions and the DNA of open finance.

Financial messaging

The challenge for all financial institutions has never been in thinking about the possibilities and new propositions that could be available to them. There are hundreds of fintechs and financial institutions around the world exploring their options for gaining a competitive advantage.

With the right planning, co-operation and support, open finance initiatives can be implemented extensively and to the benefit of many. Different players in the financial ecosystem can work together to create new services for customers, who will gain greater control of their finances, access new products and services and operate more quickly and with greater security.

However, these same financial institutions will have technology teams breaking into a cold sweat as they wonder how they are going to knit this complex web together behind the scenes. While this is indeed a difficult job, once the standards are understood in detail, then it’s possible to innovate with ease.

Characteristics of success

The most effective way to succeed will be to dispense with the established way of testing and launching new technology. As the technology changes, so must those responsible for managing it. The winners in the open finance world will be the institutions that remove friction and promote ease of adoption.

The creation of virtualised test environments and automating test processes will be key to success. Virtualised environments allow tech teams to be more agile in the way they launch or implement changes, with multiple launches per day as propositions are tweaked, refined and created.

There will be less fear with each new launch, as the financial message will already have been tested against multiple API standards and specifications. The result will be more confidence, cheaper innovation costs and a clear competitive advantage.

This approach has already yielded success for a number of progressive financial institutions around the world, as they lead the market with new product development. Many have taken concepts to market far more quickly than their rivals, who have taken several months to develop similar propositions.

If organisations can create, test and launch with confidence, then they will have a much larger opportunity to take advantage of open finance.

About the author

Alexi Karalis is CTO at Iliad Solutions.

Prior to joining Iliad, he worked as CEO and co-founder of Tesseract Solutions, and was formerly CEO of software testing firm Dynamic Testing Solutions.