Open Banking: Going from regulatory mandate to global scale

Building the infrastructure to make open banking possible

Open banking means different things to different people, but one thing is sure: it is an exciting development that will fundamentally reshape the banking and financial services landscape, for both providers and consumers. By making it easier to share data, open banking helps consumers save money, borrow more easily and pay their bills painlessly.

The concept emerged in Europe when the European Union revised the Payment Services Directive (PSD2) to require banks to provide customer data to third-party providers (TTPs) such as financial technology (fintech) partners through open APIs. This opened the door for a wide variety of new financial services.

Open banking is now a top priority for industry leaders around the world. The U.K. has kicked off its own domestic project, and regulators across the globe are developing their own open banking frameworks and guidelines.

The regulatory landscape

At the moment, however, regulation is in flux. There is currently no global standard for open banking APIs, and regulations vary in different jurisdictions. This creates serious legal, technical and operational challenges for multinational banks.

For example, the US currently has no regulations defining open banking. However, market demand has forced the US Treasury to provide initial recommendations regarding the use of consumers’ financial data to encourage innovation and prevent fragmentation, including how to support product development with sandboxes.

Essentially, regulations are all about protecting data while enabling near-real-time-connection.

Lance Homer, Global Head of Digital Payments and Banking Ecosystems at Equinix, looks forward to a future where the banking and financial services industry agrees upon a single open banking standard for accessing, transferring and storing open banking data, in a way that can be certified by a governing body and verified by an outside auditor.

“These will include how you handle the data and how your third parties receive it. If you’re a third party, you’d be under the scope of this open banking standard. This doesn’t exist right now, but in order for things to scale, that’s where things will need to be.”

Right now, however, confusion reigns. In January, JPMorgan Chase announced that it would ban fintech apps from accessing customer data, instigating individual data agreements between banks and fintech companies, which defeats the purpose.

“Chase has the strength in position to negotiate with third party providers (TPPs), whereas tier-two banks and credit unions in the US don’t have that same ability to negotiate,” Homer says. “And, think about it—there are tens of thousands of banks and a thousand or so TPPs out there playing in the space. It’s going to be impossible to negotiate agreements one-on-one.”

It doesn’t work for the consumer either, Homer points out. While those making and receiving payments generally have little understanding of how their digital payments happen, they do expect a convenient, reliable, fast and secure payments experience. It is the architecture underpinning the digital payments value chain that ultimately determines the level and scope of this performance.

“It’s unrealistic to believe that consumers will be able to sort out the legal fine print when it comes to their data, especially if different financial institutions have different protocols,” says Homer.

How do interconnection and colocation help?

Delivering these services to local populations of customers, users and partners requires a distributed presence that can challenge traditional architectures, which is where interconnection and colocation come in. Having the data, applications, networking controls and associated technologies of all the components of the transaction interconnected at secure points of presence—close to end users—helps deliver an enhanced digital experience.

“Once the plumbing is in place, fintechs and banks can really innovate on top of that,” says Homer. It’s all about the data, in other words. “Here’s the data, here’s access to the payments, now what can we do?”

Traditional architectures simply can’t support domestic data requirements or scale to meet digital demand. What’s needed is a neutral global platform that can reach all target users, interconnect all required cloud and payment partners, and integrate all required payment rails and governance controls.

This ensures fairness, so that each player has an equal chance to succeed and all play by the same set of rules, which is critical.

“If I’m a small bank or I’m a small fintech, I want a level open banking playing field. Equinix’s business model is very much about creating a level playing field of neutrality in the space so that everyone has equal access and equal participation,” says Homer.

On an infrastructure platform, all participants have equal proximity to customers, ecosystems and clouds. This lets them integrate new capabilities and dynamic cloud technologies to keep business agile and flexible. Traditional banks, fintech companies and supporting ecosystem partners can all leverage interconnected digital services on the platform to meet specific regional requirements across markets.

“In our data centres, regardless of whether you’re one of the nine Competition and Market Authority (CMA9) banks or a small credit union or local savings bank, you have the same access, the same cloud providers, the same infrastructure. When it comes to data, our position is that level playing fields benefit everybody. That’s what we’d like to see happen in the space,” Homer says.

Getting started

To compete with more agile, more flexible services from fintech and TPPs, traditional banks must embrace a digital infrastructure strategy. That begins with rearchitecting their networks for financial commerce, including deploying control points in local markets, enabling ecosystem exchange through interconnection, and optimising networks for scale and capacity.

A hybrid multicloud infrastructure approach allows banks to integrate services, collect and analyse insights in real time, and apply local governance and policy enforcement as needed. A frictionless customer experience can be achieved alongside deep learning algorithms for data analysis.

Equinix’s global interconnection platform allows banks to leverage innovation without compromising security by securing an expanding perimeter to safeguard partners and protect all associated data. Controlling access in a dynamic network environment and restricting access to cloud applications from the public internet also removes internet ingress and egress points to eliminate a stealth option for criminal activity.

Conclusion

Banks need to position their infrastructure at the heart of the ecosystem, where they can directly interconnect to the highest number of data sources, service providers, networks, clouds and other key elements of the digital payments supply chain.

As the digital payments ecosystem continues to accelerate, existing business models as well as the infrastructure that supports them are straining to keep up. Participants in the payments ecosystem will begin deploying payment hubs that not only service existing rails in a combined environment, but will also be capable of supporting new initiatives like open banking and new technology like blockchain that compete with those rails.

Additionally, open banking APIs will drive more overlay services that allow participants to create new value in the transaction, aside from just managing and moving the money. These overlay services will depend upon additional data being passed along with the traditional payment details. These trends are going to drive payment hubs into locations where payment providers can leverage application peering over private networks to connect with their partners, exchange data and handle payments traffic in ways that are not possible today.

It is therefore critical that payment companies begin with the end in mind, so that they can build a digital infrastructure that prepares them for this future.

Sources

BBVA. “United States Confronts Open Banking.” Accessed June 3, 2020.

Pinsent Masons. “Open Banking Will Facilitate Home Loan Switching.” Accessed June 3, 2020.

https://www.mastercard.us/content/dam/public/mastercardcom/na/us/en/documents/white-paper-delivering-promises-open-banking.pdf

https://www.pwc.com/us/en/financial-services/financial-crimes/publications/assets/pwc-open-banking.pdf

https://www.pwc.com/us/en/industries/financial-services/financial-crimes/library/open-banking.html

https://www.thebalance.com/what-is-open-banking-and-how-will-it-affect-you-4173727#citation-6

 

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