HOSTED BY: Ryan McEndarfer, Editor-in-chief at PaymentsJournal.com with Aaron McPherson, Vice President, Research Operations at Mercator Advisory Group
While some of our listeners may be familiar with the concept of open banking, for those who are not, can you give us a brief overview of what open banking means? And also what are some of the applications and services that open banking is addressing?
Mark Atherton, Group Vice President of Financial Services, Global Business Unit at Oracle
Sure. Open banking is rooted in the idea of data sharing between a bank and basically an unaffiliated third party. The concept isn’t entirely new, but some of what we’re doing in open banking is new. The key enabler is all around API, which is an application programming interface. And again APIs aren’t necessarily new. They’ve been used for decades in banks but typically to move banking information like a balance between a bank and accounting software. What’s new now is we’re using APIs to actually do banking activity like payments. APIs have been around for a long time. That’s pretty well established. Some of the earliest adopters were eBay or Google Maps when Google was creating mashup applications, leveraging Google Maps. But these were closed APIs, and the terms were defined by Apple, eBay, or Google. Open APIs, or open banking, the terms around the APIs are really established more by the regulator and have a common set of terms that banks are being forced to conform with, as opposed to banks pushing their own terms for the APIs out there. The European regulators spurred a lot of this effort. They started with the Payment Services Directive in the early 2000s and then came out with the revised directive, which is known as PSD2, in 2015. Again, the idea was really to spur Innovation. And PSD2 really was a launch point where we saw this really take off. It drove the banks to have to open up their banking capability and allow innovators outside of banks to create services that consumers could use and then actually reach their funds and use that through third-party services.
Aaron McPherson, Vice President, Research Operations at Mercator Advisory Group
Yes, and I think in some of the research we’ve done at Mercator one of the opportunities we’ve seen is that banks who have spent a lot of money on things like identity verification services and fraud scoring can use open APIs as a way to monetize those services outside of their regular ecosystem. So if you look at what these as done with their authentication API portal, they’re actually combining solutions from a number of different vendors and making that available. I think that’s a model that we’ll see some banks adopt if they’ve got some specialized capabilities in-house.
What is behind this industry push toward open banking, and how do you anticipate the shift toward open banking will impact the relationship between traditional banks and fintechs?
Mark Atherton, Group Vice President of Financial Services, Global Business Unit at Oracle
The initial push again came from European regulators. The UK in particular probably had the strongest push, and it was rooted in the sense that banks are holding their customers hostage. Banks were slow to innovate, but consumers really couldn’t do much about it. Some interesting services were available to consumers, but if you couldn’t connect them to the bank, it didn’t really matter. And so the banks saw them as competitive and they held them out, and that’s where that friction was in the market. Today you have a case where you’ve got applications like Mint here in the U.S. that have really strong money management service including electronic bill pay. That service isn’t very interesting if you can’t actually do the electronic bill pay. So now we can actually connect those applications to the banking...