Oliver and Franziska about PSD2, Open APIs and Open Banking

In an exclusive interview with Money Today in Switzerland, ndgit’s CEO, Oliver Dlugosch, and Head of Business Development, Franziska Zangl, share their thoughts on PSD2 toolkits, the importance of open banking and the role of Swiss banks.

Published on March 18th at Moneytoday.ch (German)

Why was March 14 an important date for PSD2?

On March 14 2019 the European financial market stepped into a new era.  The date marked the facilitated entry of PSD2’s (Payment Service Directive II) new financial service providers and innovative bank-independent services for customers across Europe.

It was the final deadline for banks to publish the description of their new interfaces and test them within a ‘sandbox’.  And it was the starting signal for the three-month test phase, during which third-party providers (TPPs) first integrate their APIs with trial and demo data in order to be prepared for roll out of services from mid-September.

What’s the difference between a Developer Portal and a Sandbox?

If you were to use an analogy, the portal represents a toolkit that gives developers an overview of all the tools available, as well as instructions on how to use them. And a sandbox is where they can play with tools safely.

A developer portal, therefore, contains all information relevant to TPPs about the services offered by the bank and how they can be used. This includes an overview of the endpoints, technical documentation of the interface and a description of accessibility.  A sandbox, on the other hand, is an isolated test environment that allows TPPs to test and integrate their offerings with the bank’s services based on test data.

What are the challenges of creating a sandbox and its features?

There are two major challenges – alignment with operational systems and management of access by TPPs.

In the sandbox phase, all communication flows between the bank and a proposed product system must already be in place. Standardisation committees, such as the Berlin Group, provide a valuable foundation for this.  However, if bank components – such as customer authentication – are not compatible with these new information flows, then banks face a tough decision.  Do they deviate from the standard or do they adapt their existing systems?

Sandbox access management requires banks to implement a registration process for TPPs in order to give them access to the test environment. If it doesn’t allow for automated onboarding, the resulting process can be very expensive for TPPs.

Banks already have enough channels to electronically exchange data with their customers – why do they need open interfaces?

Existing channels are currently focused on the direct flow of information between the customer and the bank. Open APIs, on the other hand, allow third-party vendors to access the bank’s information and provide customers with new digital services that complement and enrich their existing portfolio of financial services.

The financial market urgently needs a new type of ‘networking’ to enable these more complex interactions that act as a source of innovation and also to make the “Bank” business model viable in the digital age and more attractive to customers, partners and banks.

Retail banking, corporate banking, wealth and asset management – in which area is it best to use an open banking strategy and why?

We at ndgit are confident that all these areas will benefit significantly from a sustainable open banking strategy. For example, we’ve already seen some clever corporate banking use-cases with our clients.  These considerably streamline internal processes, like automating tax calculations, digital loan applications, payments and much more.

At the moment, most of the focus is on Retail Banking: Multi-Banking, Personal Finance Management, Insurance Comparisons, Spending Analysis and Sharing of Costs among Friends. However, there are no limits to the FinTech innovation that can be achieved once new open ‘Banking Hub’ ecosystems are established. Other technology will also impact services. For example, leveraging Robo Advisory capabilities directly from online banking could increase the convergence of retail banking and wealth management.

Why should Swiss banks bet on an open banking strategy?

Banks today face disruption on two levels. On the one hand, user behaviour is changing significantly and, on the other hand, new technologies are empowering new kinds of service.  When it comes to digital transactions, non-bank organisations like Amazon and Netflix have demonstrated how networked platforms can be designed and exploited using API technology.

Customers want to use banking services that are increasingly flexible and location-independent. Open banking not only makes it much easier for TPPs to adapt services to new customer needs but it also often enables better customer journeys. In turn, banks can take advantage of this strategic advantage by establishing ecosystems in which they offer the best complementary services from TPPs.

Of course, these fundamental changes in the value creation of banks not only affect markets regulated by PSD2 but those countries that operate in close proximity, including Switzerland. If Swiss banks don’t react to this, it will be difficult for them to compete in the future. In our opinion, open banking is inevitable for all banks looking to secure their long-term viability.

What could be the first step?

As already indicated, banks should first provide the technological basis to implement the various options of open banking. With an open banking platform, they can connect new services from TPPs much more quickly and adapt digital offerings to customer needs much more flexible.  As part of a wider ecosystem, the bank benefits from the smart, digital FinTech services, while FinTechs can access the bank’s customer data – a true win-win situation.

For this exchange to work, it requires the opening of the core banking system with modern API technology. This applies both to closed ecosystems between banks and their TPPs as well as to the opening up of the bank based on market standards such as PSD2, Swiss Corporate API or other Open API initiatives.

In Switzerland, innovation champions such as Hypothekarbank Lenzburg are already doing this. Working with ndgit, they introduced Switzerland’s first open banking in 2017 and gradually developed it into an ecosystem. Our partnership on this project was rewarded with a Euro Finance Tech Award for the best cooperation between banks and FinTechs.

Lessons learned: What mistakes should Swiss banks avoid as far as possible?

Banks should avoid waiting for regulatory requirements, or first steps by other banks, before engaging in open banking. They must develop their own models for a networked digital economy in order to be competitive in the long term. It’s much better to be a first-mover/innovator than to be a me-too/follower that is easily overtaken by the market.

Try to avoid restricting technological infrastructure as a result of short-term thinking as this can turn out to be a big mistake in the long term.  No one can really foresee where the dynamics of the market are going, so solutions must be flexible and readily adaptable.

Which Swiss banks do you know that already offer Open APIs in Germany or abroad?

As mentioned before, mortgage bank Lenzburg is already championing open APIs with ndgit. However, all Swiss banks with European branches are obliged by PSD2 to offer open APIs. These include Credit Suisse and UBS, but also card account holders such as Cornèr Bank. At the moment, the results will only apply to their European customers, however, there’s a growing interest in offering Open APIs to Swiss customers as well.

One last question, many headlines say that Open Banking combined with Instant Payments will completely revolutionize banking and payments. How do you see it?

Instant payments and, incidentally, modern direct debits (provided they are spared by two-factor authentication) have great potential for innovation, especially in terms of service experience.

To illustrate, it’s a bit like using an Uber – the actual service experience is to get from A to B comfortably but in order to do that, there are other tasks, such as choosing trustworthy drivers, paying, tipping, and so on. By performing all of these seamlessly, Uber takes this load off its users and makes the experience better.

Imagine if everything in life was like this. Cars automatically suggest the nearest gas station and pay fuel bills right away, so drivers can fill and go. Dinner ingredients are ordered fresh on the day and are delivered straight to fridge, ready to cook.  Shoppers visit a store, pick out something they like and leave, without queuing to pay. Even if some of these services are already possible, they only become really useable with clever payment solutions such as instant payment or direct debit.

Welcome to the future with platform banking!

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