Why the Financial Services Industry Should Be Happy Open Banking Was Forced On Them

By Martin Gaffney, Regional Vice President – EMEA Yugabytethe company behind YugabyteDB, the high-performance open-source distributed SQL database.

Database specialist Martin Gaffney hopes the industry now sees that Open Banking adds real value and helps businesses better manage complexity

July 2022 marked five years since the start of API specifications for Open Banking. At the time, most players in the financial services industry were unimpressed, viewing Open Banking as a hindrance rather than an opportunity.

Five years later, I think we can agree that the skeptics were wrong. In May 2022, the UK open banking community hit a record high 1 billion API calls. There are now 336 regulated providers of Open Banking-based services in the market, 246 third-party providers and 90 account providers. This shows which supporting ecosystem Open Banking contributed to.

It is therefore clear that Open Banking was not a restrictive decision by the regulators, quite the contrary.

He showed that having to work with APIs is not a constraint but in fact opens up opportunities. Accepting this fact overturned 20 years of strategic thinking in the UK banking industry. Previously, it focused on disintermediation, i.e. the added value was owning and managing your own supply chain.

The end of “disintermediation”?

Management consultants told us that brands need to do this, to reduce complexity. This was a warning that made sense when Tier 1 and Tier 2 were building their own websites and banking apps were using their own mobile solutions.

At that time, the end goal was to own every touchpoint along the online banking journey, from the mobile end to the payment back-end. However, managing the whole trip comes at a cost; complexity. Bank CIOs quickly learned that to write a new webpage, all the right links had to be configured to communicate with an application server, which had to be configured to communicate with the correct database (which lived, of course, in that dear on-site greenhouse).

Like a certain now 60 years old superhero once said, “With great power comes great responsibility. If you own everything, everything is your problem, from beginning to end. This meant having to pay for all sorts of developers with sometimes overlapping skill sets to maintain your large tech stack.

Open Banking changed all that. Welcome to a new era, that of “disintermediation”. This means that we all have to work in a different (and much more open) way.

Why? Because being able to expose and consume APIs is now a core issue in modern online financial services. You need the right skills and the right tools to support modern banking software.

Open Banking means allowing a third party to enter at the application server level

Consumers don’t care about your problems (unless they’re impacted!). All they want is a great and easy to use mobile banking app. Part of that CX is the ability to bring all of their accounts together in one place. This kind of integrated banking is why Klarna is booming, and it’s how many new payment brands work. This has spawned the explosion of FinTech.

Services like Buy Now, Pay Later and being able to transfer money between banks with the swipe of a thumb make sense for the digital native. Customers expect this level of service and connection, so you need to meet their needs, disintermediate and embrace Open Banking.

It won’t just make your customers happy. It will also make your life easier. By supporting Open Banking, you must create applications in a way that allows third parties to intervene at the application server level.

You also need to allow the other party’s application server to communicate with other application servers, all of which have databases in the background. This is surely where the API absolutely comes to the fore. In fact, the CIO of smart and relevant financial services is happy that the widespread use of APIs makes communication between two software easier.

Even better, they do this through a form of software “contract”. A commitment to provide a service that allows someone to access their bank account and return their statements or recent transactions.

With this modern digital bank, you have to give me what I need, and it all happens in an agreed format, for example, JSON, JavaScript Object Notation, etc.

The brands that will succeed in an Open Banking/disintermediated/API-centric world are those that build their processes, skill sets, tools, and architectures in a way that embraces this way of working.

They do this because Open Banking unlocks business value. APIs allow you to expose data on the web and provide access to select partners, which adds value.

It could also spell the end of the huge monolithic banking apps originally created to do digital banking. Developers are now regularly breaking the front and replacing proprietary apps with APIs.

Modernizing apps and microservices

Why? Because moving to an API-based model allows you to externalize the value of your back-end, even if it’s still stuck in a monolithic mainframe application in your data center.

Indeed, with APIs and the cloud, two distinct threads of technology and business development dovetail neatly: application modernization and microservices. These bring everything to do with data closer to the customer, anywhere in the world.

Open Banking started as a push to allow more competition in the marketplace, but revealed that the API is the best way to comply with regulations and solve many of your technical debt issues.

When you go down the path of disintermediation by breaking your big banking systems, you are also breaking your data. You can’t just stick with the proven (but horribly expensive to run) monolithic database in the background. Your on-premise monolithic proprietary databases never mesh well with cloud and microservices.

The best solution is to move to the modern data layer, an intrinsic part of this microservices architecture. Given this, consider the YugabyteDB distributed cloud SQL database, for example. This gives you huge operational, development, and support benefits.

Given all that’s been done for the industry, this summer raise maybe a piña colada or two at Open Banking, which has opened the door for your banking CIOs to access business value by putting in place a supply chain that you no longer need to own 100%.