- What is Open Banking?
Open Banking is a protected way of sharing customer’s financial information with third-party providers. With customer’s consent, banks can share account and transaction details with third parties through application programming interfaces (API). Open APIs enable exchange of information between the bank and third-party software provider. This helps banks to offer tailored products and services to acquire and retain customers.
For third-party service providers to be fully authorized to use Open Banking APIs, they must be registered under one of or both of the following:
AISP– Stands for Account Information Service Provider
PISP– Stands for Payment Initiation Service Provider
- What are Open APIs?
Open APIs expose a range of data to third-party financial service solution providers. They enable third-party developers to build applications and services around the financial institution.
These APIs are designed to support Open Banking regulations. Through the adoption and deployment of APIs, banks can extend and enhance their native services and offerings. Banks can rapidly advance their digital transformation agenda in the Open Banking world by leveraging third-party applications and service ecosystems that are enabled by API
- What are the benefits of Open Banking?
Advantages of Open Banking to Customers
- Customer reaps the benefit of choice:
Most banks offer similar services that are limited in scope. More importantly, most banks aren’t really good financial advisors. With Open Banking, customers can reap benefit of choice as they have multiple options, or service providers to choose from. Therefore, you are not forced to use any specific software because it is bundled with your account.
- More customized and relevant product offerings:
Most banking apps have the same set of service options. With entry of newer service providers, the factor of customisation and service personalisation will be introduced, which will massively benefit customers.
Advantages of Open Banking to Fintech
- Easy Way For Banks to Extend Their Services:
Most banks have embarked on the Fintech journey. Open banking provides them with the opportunity to expand their offering sand include more services under their umbrella.
- Meet The Customer Requirements:
Today’s customers are always looking for more. With open banking, financial institutions will have so much more to offer to their customers and keep them satisfied.
- Open Banking’s Five Key Challenges to banks
- Deep customer apathy
The prerequisite for open banking is participation by customers who voluntarily agree to allow access to their data. It’s vital for open banking to take off. However, open banking aspirations appear to have fallen on deaf ears — on an average only 26% of customers globally favor adopting open banking; this percentage is much higher in emerging markets.
- Lack of customer awareness.
As with any significant change, open banking requires massive education to familiarize customers with the concept and generate buy in. Customer apathy may well result from banks’ failure to effectively communicate and educate customers about the changes to banking terms and conditions that precede open banking.
- Better entrenched competition.
As banks navigate their way to the digital era, they are confronted by several non-bank forces such as fintechs, new pure-digital entities, large non-banks such as Amazon and technology vendors. Each of these have begun rewriting the rules of the banking game and are creating a new banking ecosystem, challenging banks to respond.
- Data sharing anxiety.
Open banking relies on data sharing. This marks a paradigm shift for banks. Their difficulties range from the prospect of losing control over customer data and product cannibalization that might result. Banks appear to be struggling with how much customer data they can subject to exposure in order to participate meaningfully in the open banking ecosystem.
- Legacy systems constraints.
Traditionally, departmental structures, product-centricity and compliance goals have influenced the rollout of core banking systems. Such legacy systems have become complex over time and are preventing effective interoperability with open banking APIs. The critical shift to customer-centric systems and agility enables banks to overcome the limitations of siloed legacy systems.
- What Is Strong Customer Authentication?
Strong customer authentication (SCA) is a requirement of the EU Revised Directive on Payment Services (PSD2) on payment service providers within the European Economic Area. The requirement ensures that electronic payments are performed with multi-factor authentication, to increase the security of electronic payments. Physical card transactions already commonly have what could be termed strong customer authentication in the EU (Chip and PIN), but this has not generally been true for Internet transactions across the EU prior to the implementation of the requirement, and many contactless card payments do not use a second authentication factor.
- What is the Strong Customer Authentication requirement?
SCA will require payments to be authenticated using at least two of the following three elements:
1) Something that the customer knows (e.g., password or security question)
2) Something the customer has (e.g., phone or hardware token)
3) Something the customer is (e.g., fingerprint or face ID)
- Which payments will be covered under SCA?
Strong Customer Authentication will apply to customer-initiated online payments within Europe. Most card payments and all credit transfers will require Strong Customer Authentication. Recurring direct debits are considered merchant-initiated and will not require SCA. A card payment will be in scope of the regulation if the cardholder’s bank and the business’s payment provider are both located in the European Economic Area (EEA).
- What are the implications of SCA?
One of the most important implication of Strong Customer Authentication (SCA) is that it will drive acquirers and other entities in the payment processing ecosystem to improve their fraud rate as that would mean they could offer frictionless flow at higher thresholds which will mean improved security in the payments space but it can also have an negative impact as its implementation can hinder customer experience and place additional burdens on merchants and Payment Service Providers (PSPs).