Into the digital future: How established core banking systems are getting fit for open banking
Banks work with highly sensitive data and so are subject to the strictest regulations. Accordingly, core banking systems were designed to optimise support for banking processes while ensuring data security.
However, the new digital age requires banks to open up and network with third-party providers. Consequently, banks are now faced with the new challenge of how to share their data safely. They have two options: they can either expand and decouple the core banking system in their existing infrastructure or adapt existing systems so that they enable cooperation with third parties.
The Swiss Bankers Association (SBA) addresses this challenge in its current regulations and makes it clear that open banking, and the development of ecosystems, are now strategic issues for banks. It also includes API standardization (API communities) for digital platforms as a decisive factor in the context of an open banking strategy.
Fit for success
With this in mind, let’s look at the two approaches to opening up. Firstly, any expansion – or even the exchange – of a core banking system is a massive undertaking. It comes with high costs and an outcome that is not always predictable. It’s why banks generally choose the second option – adapting their existing core banking system by connecting it as best as possible to API platforms and thus preparing for the future of open banking and related ecosystems.
Hypothekarbank Lenzburg in Switzerland is an award-winning example of how adaptation can work successfully. Its Finstar® ecosystem has been strategically expanded using ndgit’s open finance platform. It also reveals how successful open ecosystems arise primarily through collaboration with third-party providers.
The power of ecosystems
Ecosystems enable banks to offer their customers new products from third parties that they would not otherwise have in their portfolio or would have been unable to develop themselves without a connection through open banking.
At the same time, ecosystems also offer banks the opportunity to integrate their own products and services with other financial service providers and with other partners via digital channels. This creates an additional service and thus a clear added value for the customers, but also for the bank.
And it’s not just B2C areas that benefit from ecosystems. There are also new use cases in the corporate customer segment, such as a simple integration of lending platforms for corporate loans, financial management solutions via a comparison of bank accounts or automated factoring in accounting.
Three areas of focus
Looking at the SBA regulations again, there are three key areas that are particularly important in order to support new business models in a platform economy.
1. Open banking as a strategic decision
Banks have always had exclusive access to their customers’ data and were able to use it profitably. New market regulations and the disclosure of bank data to third parties is changing this. Digital market participants can now offer innovative financial services and products using banks’ customer data. However, they are not pure competitors and with appropriate integration, can help expand bank offerings – for example, through a completely digital credit line or a digital offer for portfolio management.
Banks, therefore, have to rethink their technological infrastructure (aka backend systems). Instead of continually optimizing service architecture for internal services, as before, it’s now important to design open and flexible platforms that give external providers controlled access via open banking enabled APIs.
It’s clear that open banking is more than just an IT architecture. It’s a business strategy that determines the extent to which a bank wants to open up to regulatory requirements such as PSD2; and for partners and third-party providers in order to derive new use cases and added value for customers.
In my experience, bank IT architects are often commissioned to define new integration architectures without knowing all of the intended use cases. As a rule, this leads to a low level of acceptance of open banking in the company and unrealistic expectations among everyone involved. A clear strategic specification of the goals and applications of open banking is, therefore, a must.
2. Standardization for the greatest possible market coverage
There are already numerous options and technological standards for connecting third parties to core banking systems, e.g. via SOAP or REST technologies, remote procedure calls or message-oriented middleware. In addition to these, technical, domain-specific standards have also been established.
In order to remain fit for the future, it is necessary to network efficiently with the largest possible number of partners and to develop new sales potential e.g. through “Banking as a service”. It is, therefore, crucial to rely on well-known technological standards as well as on technically standardized interfaces and to participate in API communities.
Europe’s most widespread open standard API communities are the Berlin Group and UK open banking, both of which deal primarily with account access in payment transactions. Among other things, they specify how data is made available and how access to the data should be secured in order to enable the simplest and quickest possible networking.
Choosing not to use a standardized interface, can lead to higher investment in the development and operation of the open banking infrastructure. In addition, isolated solutions can be more costly to integrate with respective partners and cause lower market acceptance.
In general, API communities are primarily concerned with payment account applications (payment initiation, account aggregation) as part of the interface standardization. But this is also changing. For example, in addition to the SIX standard for payment transactions and multibanking (which is the subject of the SBA regulations), a new API community is pursuing a standard in private banking. Driven by the St. Galler Kantonalbank, this initiative aims to provide external asset managers (EVV) with easier access to custody accounts from custodian banks. This ambitious project will only succeed in establishing itself as a banking standard in private banking if it is accepted and implemented by a large community of custodian banks and wealth tech companies.
3. Modular structure and efficient API management
In addition to the actual interfaces, it’s also best to solve recurring tasks for different APIs centrally and in a standardized manner. For example, questions about security, logging, monitoring and also versioning of interfaces arise with almost every API. API management platforms, which are specially designed for use by banks with high-security requirements, offer simple best practice approaches. They enable security questions such as authentication or authorization, consent management (user opt-in / out), access limitation or encryption to be answered clearly.
As the number of connected partners in the ecosystem increases, the effort required by bank API teams to manage the corresponding interfaces also increases ( e.g. developer documentation of internally and externally integrated APIs or lifecycle management). Therefore, banks need a platform solution to help manage APIs centrally and easily. It is the only way to efficiently implement networking and digital banking, monitor applications and partners and evaluate the performance of all those involved. At the same time, it enables access to be granted or withdrawn more easily to partners via such a central API portal.
Conclusion
Open banking or open finance platforms enable banks to securely open their core banking systems in order to tap new sources of income. Using standardized interfaces from API communities, banks can respond to their specific needs and use cases without the cost of integrating each specific partner. This minimizes development and integration effort and gives banks the scope to expand open banking as desired and to scale it as an ecosystem fit for the future.
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