Open Banking: Taking a Wait-and-See Approach Can Get Expensive

FinTech experts are warning that Switzerland is in danger of missing the open banking trend. Seemingly very technical at first glance, what is this trend about? To what extent will it transform the financial center?

Open banking means the standardized, secure data exchange between banks and trustworthy third-party providers. This allows for new offerings that create added value for consumers and strengthen the innovation in the financial center. The technical implementation involves modern application programming interfaces, so called APIs.

First of all, you need to know: In the EU, the PSD2 requires banks to open up their interfaces to account and transaction data to third parties (e.g. FinTechs) at a customer’s request. Corresponding rules are also being planned in other central markets, such as the USA. In contrast, Switzerland has taken a market-driven, self-determined path.

Despite the criticism expressed at the outset, SIX finds that self-regulation is currently working well, especially with regard to the implementation of possible new use cases for APIs. An example of this is “Open Wealth”  – an industry initiative for standardized interfaces in asset management launched by St. Galler Kantonalbank in collaboration with the consulting company Synpulse. Within only 9 months of defining the standards, the interfaces could already be implemented at St. Galler Kantonalbank through the bLink platform of SIX. This way, Switzerland is already ahead of the regulated EU still focusing on interfaces within the payment sector.

Zürcher Kantonalbank has also gone live with the offering recently. Moreover, the three portfolio management systems Assetmax, Alphasys and Etops have connected to the APIs through bLink on the side of third-party providers. Organized as an association, the OpenWealth initiative is continuously gaining more banks and FinTech companies as members and is striving to internationalize the standard. OpenWealth holds enormous potential for innovation and gives the Swiss financial center the opportunity to further expand its leading global position in asset management. There are also similar initiatives for mortgages and pensions schemes already in development.

It is clear that a successful market-driven approach requires a coordinated process within the industry. In particular, the players involved have to agree on common technical standards. Therefore, the broadly supported industry association Swiss Fintech Innovations coordinates the corresponding process in Switzerland. Moreover, the Swiss Bankers Association clarifies legal and safety-related issues of open banking and represents the combined interests of the industry in dealings with the authorities and the public. With API platforms such as bLink of SIX, the Open Business Hub of Swisscom or the ix.OpenFinancePlatform of Inventx functional solutions are available that allow efficient implementation and scaling of interfaces in the market.

Despite all the progress that has been made in open banking, it is important to note that we are still in the early stages of a development that will bring a lasting change in the financial industry. From the customers’ point of view, the potential of open banking is great − even if most of them are not yet aware of it. For example, open banking allows us to manage all of our bank accounts in a single app (multi banking) without logging in to each bank separately. Or, it can reduce the manual work done by accounting at SMEs thanks to integrating their account data directly into their accounting tool via an API. Similarly to an app store, each API offers countless possibilities both for corporate and private customers.

Open banking, or more broadly speaking open finance, i.e. providing additional types of financial data (such as loans, assets or pensions), is only the first step towards a fundamental change of the current value chain for financial products based on APIs.

In recent months, there has been an increasing amount of talk in the media about new offers for embedded finance or banking-as-a-service. Both terms mean the next expansion step of open banking. Embedded finance describes the integration of a financial service into a non-financial offering. For example, it allows banks to integrate the offering and applications for loans directly into a company’s accounting solution.

banking as a service takes it to the next level. In other words, financial services are also offered by companies operating in other industries. To meet the regulatory requirements, they often engage an infrastructure provider with a banking license in the background.

This is why we can see the German real estate agency Engel & Völkers now providing its customers with a bank account and a respective card via an app. By doing so, this company competes with established banks. Cards and accounts are probably just the beginning, with other integrated offerings such as mortgages to follow. On this basis, FinTechs or large tech companies have been entering the market with competitive financial products for quite some time already, also in Switzerland. It can generally be said that Banking as a Service lowers the barrier to entry for new providers to offer their own financial products, as they do not need a banking license or a core banking system. By means of an integrated offering, these companies expand their customer interface and build comprehensive, cross-sector ecosystems.

For banks, open banking is an investment in the future. However, despite the positive development in Switzerland, it is still unclear for many which use cases may emerge one day. Thus, the first priority is to deal with open banking strategically and to build up experience and necessary competencies in its initial practical application. In this context, it is important to consider other key benefits of open banking in addition to the direct monetization of interfaces. Using relevant applications, banks improve customer experience, enter new markets and sales channels, and increase their transaction volumes.

As the beginning of a new world based on APIs, open banking forces banks to question their strategic positioning in the market: As a bank, where am I able to meet the needs of my customers better than anyone else and thus keep the customer interface? Where should I support other providers as a strong partner in meeting these needs?

Given the international developments mentioned above, the opportunity costs for Swiss banks that wait to answer these strategically important questions do seem very high − and unnecessary. The sooner they take the first step towards open banking, the greater their chances of continuing to compete with attractive offerings for their customers in the future. And Switzerland has already built the appropriate foundation for this.

You can read a previous version of this article on Die Volkswirtschaft (German and French only).