The Proliferation of Open Banking
Author: Karl Buys
As technology evolves, and as existing banks work hard to try stay relevant, the world has seen a proliferation of a tend called “Open banking’. What open banking is, is when a financial service provider (FSP) designs a computer system designed to make a client's banking data available to third parties with explicit permission from the client whose data they are disclosing. It is a new trend that has been driven, in part, by the GDPR legislation adopted by Europe.
With the proliferation of online banking, in 2007, the European Union (EU) passed a piece of legislation called the Payment Services Directive (PSD), which sought to regulate and formalise interoperability between electronic banking services. In 2013, the EU reviewed the PSD in order to build on it, and released PSD2, the second version of legislation aimed at protecting consumers.
The stated goal of PSD is to provide integrated and efficient payments market, as well as level the playing field for new market entrants. This would drive competition, lowering the cost of payments, as well as protect consumers’ personal information more securely.
PSD2 stipulates that a customer is the owner of their personal data, and this data can only be shared with third parties with the customer's explicit permission. Once shared, at any stage, customers would be able to revoke other service providers' ability to continue accessing their data. A properly compliant PSD2 system would allow the consumer to share their personal banking data with third-party service providers, like Amazon and eBay.
Typically, these open banking systems provided by financial service providers make the data available to third parties accessible via a representational state transfer application programming interface (REST API). A REST API is a computer system which allows other unrelated services to interface with it by communicating using a standard framework both systems understand.
The drive towards open banking is giving rise to new businesses which leverage a user’s financial information to assist them in budgeting, detect double debits, and make them aware of possibly fraudulent debit orders.
One of the emerging business models is widely referred to as an account information service provider (AISP). These are businesses who have control of a person’s financial data and allow third parties to access a customer’s account data. Typically, the third parties use this information to provide beneficial services to the customer, such as comparisons of different insurance quotations, and loan services the client qualifies for, in addition to other services mentioned earlier.
The other type of business open banking enables is payment initiation service providers (PISPs). These are companies who initiate payments into and out from a user’s account. PayPal and Alipay are among the most famous of these businesses.
In South Africa, we're seeing more interest in open banking from big players in the financial space, including, but not limited to ABSA, Nedbank and Investec. That said, open banking in South Africa is still in its infancy.
We recently completed a project for ABSA as part of their push towards open banking. They wanted to be able to offer online loans as a payment option on sites like TakeAlot. For this, they wanted a way to offer loans to non-ABSA clients, by retrieving and checking a person’s income and expenses in some manner.
When designing the system, Techno Ponies was constrained by a lack of available open banking services that would allow ABSA to access said client’s bank statements. We solved the problem by developing a solution which performed screen-scraping (a technique used to retrieve data from websites where no API-based solutions exist).
The user would supply their online banking profile and password to our system, and our system was able to simulate being the actual user, logging onto their internet banking and performing the necessary steps to download three months of bank statements. It then extracted the statement data and saved it to a database, for later use.
Holistically, ABSA would retrieve the data from our system in order to plug this data into their own vetting system so that they could evaluate the client’s expenses and income, and creditworthiness.
Screen scraping has huge potential pitfalls as far as reliability is concerned. Because the application expects a website structured in a specific way, any changes to the third-party bank’s online banking would necessitate reprogramming, due to the online banking behaving differently to what the system expected. Another shortcoming was that the third-party bank would be able to blacklist systems if unusual traffic was generated by them.
Without true open banking, a market opportunity presented itself. Certain companies act as AISPs, integrating with banks via a REST API where possible, and where not, falling back to screen scraping. These companies are supported by a team of developers, ready to jump in as soon as their service is no longer able to retrieve data from the various companies it processes through screen scraping.
The open banking marketplace ABSA envisioned was to provide access to a number of systems offered by ABSA as part of its open banking initiative. Had the open banking initiative been driven further by them, ABSA would have uniquely positioned themselves to facilitate access to financial data by third parties, as well as facilitate the ability for third parties to build applications where they could advance loans as well as facilitate payments.
ABSA would have uniquely positioned themselves as both a PISP, as well as an AISP by allowing fintech providers to leverage their infrastructure and services. The end result of this would’ve put them in a unique situation where, instead of ABSA bearing the expenses like marketing and acquiring clients, other companies would bring the users to them instead.
In South Africa, the proliferation of open banking is in its infancy. With new competitors, like Discovery Bank and Thyme Bank emerging, traditional market incumbents are being forced to innovate. The process of applying for a home loan traditionally involved having to produce two years’ worth of audited financials. With proper open banking, the difficulty of obtaining these will hopefully soon be a thing of the past.
We’ve already examined how the personal loan industry is being streamlined. Don’t be surprised to see new tools become available in the space of robo-budgeting, robo-investment, robo-loans, and a variety of price comparison solutions like Hippo.co.za enter the market. Expect fierce competition for market share, as incumbents and new competitors drive open banking forward.
General Manager: Software
Karl is from Johannesburg, South Africa. He holds a BSc in information science, and is the GM responsible for management of Techno Ponies' software development and consultancy team. He has over 15 years of professional experience as a programmer, having worked on the financial sector, as well as experience developing an MVNO (Mobile Virtual Network Operator) solution. In his spare time, he's an avid gamer.