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Open banking – safe and secure

11.08.2020

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This article was published in the Ergon Magazine SMART insights 2020. Order your free copy now ->


Once unthinkable, open banking, unfettered access to banking services via an interface, has now become a trend. Open banking allows third-party providers (TPPs) to offer their own financial services to clients, irrespective of the bank that actually manages the account. This expansion of the customer interface has already been regulated in the EU and currently operates on a voluntary basis in Switzerland. What are the key success factors when it comes to opening up such access and what insights might the Swiss glean from their neighbours?

In Switzerland, an important financial centre, changing customer needs, innovative technologies and a growing and diverse range of financial service providers, including banks, fintechs, neobanks and non-financial-sector players, are all ratcheting up the pressure on traditional banks. The regulated introduction of open-banking standards is leading to increased international competition within the euro area, and the positive effects of this change are already being felt. The era of open banking was ushered in by EU regulators after legislation forcing financial institutions to open up customer interfaces, the Revised Directive on Payment Services, or PSD2, was passed. Interest groups from the software and banking industries in several member states, such as the Berlin Group in Germany or Open Banking Limited in the UK, have adopted these procedures. The goal is to ensure that as many banks as possible follow the same protocols in adherence to the regulatory guidelines, thereby enabling standardised access for TPPs. While there is justified concern that such new regulation may hamper and unnecessarily restrict the momentum of the sector, a free and transparent capital market with a standardised environment that is nonetheless sufficiently flexible to accommodate international factors, for example Swiss exceptionalism, certainly represents a major opportunity.

Marc Bütikofer, Ergon

“A successful opening requires rock solid IT security and an infrastructure that is fit for development.”

Marc BütikoferHead of Innovation Security Solutions Airlock, Ergon

A new business model

The Swiss financial industry is notcurrently subject to PSD2-styleregulation and any “compliance”has so far been voluntary. Oneof the key challenges concernsthe fact that the adoption ofsuch a system would require anideological regime change. Traditionally,Swiss banking has reliedon absolute discretion, reserveand trust. The demise of bankingsecrecy and the advent of tax treatieshas already largely pulled therug from under the first of theseand now open banking is drivinga fundamental opening-up of thebusiness model and the integrationof TPPs. This could lead to bankslosing their direct interface withclients.

At the same time, an expansionstrategy offers considerablepotential for growth and representsan opportunity to retain the trustof customers. Publicly accessibleinterfaces enable TPPs to deliverspecialised services to clients ina faster, more efficient and moreuser-friendly manner than banksoperating monolithically – this isa familiar pattern with successfulstartups. Here, the bank’s handis strengthened by openness, asit can use an enhanced serviceportfolio to respond nimbly to the market and boost its competitiveness. The logical outcome is a quicker time-to-market with new services. Both of these improvements will have positive ramifications for a bank’s image amongst the online community: customers will see that new and attractive services are coming on stream for their bank and this will promote acceptance and generate favourable feedback. Standardisation of open interfaces will allow banks to benefit from an ecosystem of partners to cater for rapidly proliferating customer needs – it can also open up new revenue streams from cross-sector sources, creating further added value for the client base. A modern bank will therefore need a business model that is consistently orientated towards agility and adaptability.

Opening up – the success factors

A successful opening requires rocksolid IT security and a corporateIT infrastructure that is fit fordevelopment. Liability issuesarising from cooperation with TPPsmust also be settled.The ability to provide interfaces(APIs) and expose them to theoutside world on robust enterprisearchitecture is critical. Whilerunning APIs is a standard task, thelatter is still anything but a given– specialised components suchas API gateways are required tomake technical interfaces availableto multiple TPPs in a controlledmanner. What’s more, not onlyusers have to be authenticatedbut organisations. Existing modelstaken from interactions with users,for example e-banking, cannot beapplied, one-to-one.

More interfaces mean more attacksurface and, thus, new risks. AsTPPs receive a direct channel intoIT infrastructure, banks must takeparticular precautions in order tobe able to monitor the effects ontheir core business as closely aspossible. Here, too, tried-and-trusteddefence mechanisms frome-banking cannot be transferreddirectly to APIs.

In addition, banking customers willwant to decide for themselves whocan access their data and to whatend. User-consent forms must beincorporated into digital processespromptly and without the need forcomplicated contractual detours.Setting up a system to acquiresuch permissions quickly, securelyand with minimal hassle is a keysuccess factor and a core requirementfor banking customers.

The questions of liability fordamages under this kind of regimeand the extent of any third-partyobligations have yet to be defined.These issues were resolvedunder PSD2 in the EU, with liabilityresiding entirely with the banks butfinancial institutions in Switzerlandare digging their heels in againsta 100 per cent adoption of such aregulation. In the absence of formalguidelines, however, Switzerlandruns the risk of stymying the openbanking concept and falling behindthe rest of the world.

The last success factor is theactual “meat on the bone” – thestandardised definition anddevelopment of interfaces forTPPs. In order to serve as manydifferent use cases as practicablewith the fewest possible interfaces,it makes sense to divide today’soften complex service landscapeinto elementary building blocks:this is the only way the innovativepower of fintechs will be able toevolve freely. How small thesebuilding blocks might ideallybe will depend on your vantagepoint: banks have an interest inretaining as much of the value chain as possible, while fintechs will typically want to make use of services that are as far upstream as possible and to add their own value. Quite where the “happy medium” lies remains to be seen. Banks that adopt a standard PSD2 API will be subject to significantly more restrictions, which may prove a blessing in disguise – thanks to standardisation, they can expect more TPPs to use their APIs and, thus, will be able to generate greater utility and higher returns on investment.

Adrian Berger, Ergon

“It is clear that open banking is set to influence and change Switzerland’s financial market over the long term, however, the exact contours of this transformation have yet to emerge.”

Adrian BergerManaging Director Finance & Telco Solutions, Member of the Executive Board, Ergon

A diverse spectrum with a rosy future

It is worth looking to the UK for a glimpse of what the future might look like. Its open banking API standard applies to far more than just payment transactions – it covers all aspects of banking that are relevant from the user’s perspective. The upshot is an ecosystem of more than 200 regulated service providers consisting of TPPs, account providers and the major banks. The figures speak for themselves: more than 1.25 billion API calls were placed and processed in 2019, indicating high user acceptance. The success factor that tipped the balance for establishing open banking in the UK was the extremely close collaboration between regulators and all market participants. A durable and sustainable public-private partnership was created that permitted the UK, alone amongst EU countries, to declare a single technological standard to be mandatory, with resounding success.

Switzerland’s financial market

Switzerland is still a long way off successes on the UK’s scale but voluntarily opening up interfaces represents a great opportunity to help shape the financial market and position companies actively. Individual banks have spotted this potential and have already implemented such a policy with success, managing to establish a fast-growing partner ecosystem with open banking and open interfaces based on their existing IT environment. Several TPPs are backing this approach and have lost no time in bringing innovative services to market. Combining traditional and open banking enables a more efficient time-to-market, ensures satisfied customers and allows both the bank and the TPP to access additional revenue sources. The successes, and associated reputational dividend, achieved by these first-movers speak for themselves. How this will develop and which banks will manage to carve out a niche for themselves is still uncertain. The burning question on everyone’s lips: will the Swiss take the fight to the Anglo-Saxon countries with an ecosystem of their own? It is clear that open banking is set to influence and change Switzerland’s financial market over the long term, however, the exact contours of this transformation have yet to emerge.

This article was written by Adrian Berger, Managing Director Finance & Telco Solutions, and Marc Bütikofer, Head of Innovation Security Solutions Airlock.

 

Open banking in Switzerland – an overview

There are currently eight different initiatives promoting the establishment of open banking in Switzerland.
Ergon is a founding partner of OpenBankingProject.ch.

 

Table contents based in information supplied by the individual open banking initiatives. (last updated April 2020).

*The Common API and Open Banking for Switzerland from SIX initiatives joined forces in August 2020, but will also remain as listed.

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