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Benefits of Open banking in modern times

The concept of "Open Banking" has gradually become popular and implemented swiftly as per the Payment Service Directive 2 (PSD2) of the European Union. Ranked third in the top 10 trends of the retail banking industry for 2020 according to Digital Banking Report Research of The Financial Brand, Open Banking is a technology that is capable of revolutionizing the financial sector.


Open banking (also known as open platform banking) is a type of banking that takes advantage of an Open Application Programming Interface (Open API) to allow third-parties to develop applications or for service providers to access bank database so that banking services can reach users quickly through many platforms;

The API minimum set that PSD2 prescribes for banks includes:

  1. Account Information Services (AIS) to enable third-parties to retrieve data from different bank accounts.

  2. Payment Initiation Services (PIS) to enable third-party providers to initiate payment.

  3. Confirmation on the Availability of Funds (CAF) to enable third-parties to determine whether there is sufficient liquidity available in bank accounts.

The transition from a closed ecosystem (traditional bank) to open banking enables banks to expand and upgrade their service offerings and have the opportunity to directly interact with new customer categories.

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  • The transition from a closed ecosystem (traditional bank) to open banking enables banks to expand and upgrade their service offerings and have the opportunity to directly interact with new customer categories.

 

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Transformation from closed ecosystem to open banking - Source: Deloitte Digital (2017)

Benefits of implementing Open Bank

Through Open API, third-parties can rely on authenticated information databases from banks to conduct research and development of programs, tools, or applications to meet the needs of customers. Open Bank fosters cooperation among banks and third-parties to help banks synthesize quite diverse and complete data sources from which to analyze customer’s behavior, anticipated needs and fulfill these anticipated needs. Banks and third-parties can then leverage on each other’s strengths to build a new banking ecosystem that is more tailored to the needs of customers. This will allow customized service for each customer segment (e.g. suggesting credit loan packages, saving deposits, for different demographics).

DBS Bank in Singapore built an open ecosystem through Open API and implemented an effective strategy of digital transformation. From a bank with the lowest satisfaction score in Singapore in the early stages, DBS quickly became the "Best Digital Bank of the World 2018" according to Euromoney. DBS is still at the forefront because it develops banking services that are entirely focused on mobile, non-branch banking.

Open banking benefits customers too. It improves customer experience through ease of access to information and having multiple innovative services in a single application. The more users accessing Open Bank, the more the integrated APIs and applications have the opportunity to diversify to meet more of their needs.

The table below describes the implementation and development of open banks across the world. 
(Source: Open Banking, Preparing for lift off by ODI &  Fingleton)

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Vietnam is paving the way to develop a legal framework for Open Banking

Sharing customer data with many other parties is a relatively new concept to banks in Vietnam and a large number of users are still skeptical about the security and safety of their data when shared to many parties. Legislators and banks are still trying to learn from the experience of others to develop a regulatory framework and standards that is suitable for Vietnam's financial market and to gain the trust of users and minimize risks.

According to Decision No. 328/QD-NHNN dated March 16, 2017, the Governor of the State Bank of Vietnam (SBV) established a Steering Committee on Fintech. One of the major aims of the Steering Committee is connecting and sharing data through the Open API.

In June 2018, the Department of Information Technology of SBV surveyed the banking and finance industry on Open API to determine the status of data readiness between banks, customers and third-parties and demand for connectivity standards for the banking industry and Fintech companies.

Based on the experience from the developed countries in the previous implementation of the Open Bank model and the insights gleaned from the survey, in October 2018, the Department of Information Technology of SBV signed a memorandum of cooperation with Korea’s National IT Industry Promotion Agency (NIPA) and the Korea Financial Telecommunications & Clearings Institute (KFTC) on Open API interface in the banking sector.

Experts said that developing Open API will help banks solve the problem of diversifying financial services, reaching different customer segments with reasonable cost of human resources and finance, and shortening product development time. To develop Open API standards, Department of IT found that, for Open API to be deployed in the Vietnamese banking industry, there are numerous legal and technological issues that need to be clarified and removed such as: Security, privacy, model, standard connection between the banking system, Fintech companies; scope and schedule of opening data of banks; security issues in protecting the system against the risk of illegal access...

Currently, SBV is following the direction of the Government to conduct research on security technology, how to manage identity on an open platform to help verify account information and how to standardize the authentication process between financial institutions and third-parties. SBV’s aim is to help banks to achieve financial services diversification and reach different customer segments at reasonable costs of human resources, finance, time, to maximize benefits for customers.



Reference:

1. Top 10 Retail Banking Trends and Priorities for 2020

2. CREALOGIX Public APIs 

3. Open Banking: What Does The Future Hold? 

4. Open Banking: Preparing for lift off 
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