Why the PSD2 will Spark Digital Innovation in European Banking and Payments….

Banking may be on the cusp of an industrial revolution. This is being propelled by technology on the supply side and the financial crisis on the demand side. The upshot could be the most radical reconfiguration of banking in centuries.” – Andrew Haldane, Chief Economist, Bank of England, 2013 [1]

This blog has discussed Banking and Payments industry trends quite extensively over the last year. Perhaps the most groundbreaking directive from a supranational regulatory standpoint has been the promulgation of the Payment Services Directive revision 2 (PSD2) in the European Union (EU). The PSD2 is a technology driven directive that aims to foster competition, digital innovation and security across Retail Banking & Internet Payments.

Banking and Payments Innovation in the EU..

The first Payment Services Directive (PSD1) came into vogue in the EU in 2009. With the stated goal of creating a Single Euro Payments Area (SEPA), the PSD1 provided created rules and frameworks for the creation of modern payment services as well as opened up payments to new entrants. The goal of the Single Euro Payments Area is to standardize the way euro payments are made across the EU and to make all cross border payments in euro as seamless as making domestic payments within a given member state. SEPA covers the whole of the EU and other non-EU European countries such as Iceland, Finland, Norway, Switzerland. Monaco etc.

A revised PSD (PSD2) was proposed in 2013 –PSD2 – EU Directive 2015/2366 . The PSD2 carries huge and monumental consequences in two lines of Global Banking – Retail Lines of Business (which typically include consumer savings & checking accounts, auto loans, mortgages and Small & Medium Enterprise Lending) and Payments (card payments, corporate payments, credit transfers, direct debits etc).

Many leading European Banks were propped by the EU Central Bank during the financial crisis. However, most have not innovated in any meaningful manner as their market shares have largely stayed intact with consumers still facing difficulties in cross border transactions. The EU clearly wants to use PSD2 as a vehicle to drive banking & payments innovation. Added to this is the Digital trend driven largely by global companies in the US and Asia. The intent of the PSD2 is to jumpstart the slow pace of innovation in the EU.

The PSD2 aims to foster a single market for consumer payments and eventually banking services. It intends to provide a framework for EU companies to respond to competitive changes in the payments landscape which have largely been driven by technology. The PSD2 also aims to drive further improvements in payment services across Europe by providing a number of enhancements to the PSD1 around the areas of mobile & online payments. It also harmonizes pricing and security among all member states. EU member state companies have until January 2018 to implement the PSD2.

It needs to be stated that all transactions that are ‘one leg out’ where at-least one party is located inside the EU – are within scope of the PSD2.

Open Banking, GDPR and PSD2…

The core themes of PSD2 may not be all that new for the UK banks for Her Majesty’s Treasury is putting finishing touches on the Open Bank Standard (OBS). While the topic has been covered quite exhaustively before in this blog, the themes are very similar as compared with the PSD2 – 

A Reference Architecture for The Open Banking Standard..

While the General Data Protection Regulation (GDPR) deserves it’s own blogpost, it certainly seems to impose an opposite effect on the industry as compared with PSD2. Let me explain, while the PSD2 forces banks to unlock customer data via APIs, GDPR imposes stringent requirements on them to protect customer data. It becomes effective on May 2018 (a few months after PSD2). Given the scope of both PSD2 and GDPR, banks will need to carefully assess and calibrate changes to a range of areas across the organization – security, lines of business communication, data management, partner ecosystems, outsourcing agreements etc.

So what does the PSD2 entail..

As mentioned above, the PSD2 moves the EU towards a single payment zone by creating explicit new institutional roles in the banking landscape. The goal is to clearly increase competition by changing the rules of participation in the banking & payments industry.

Under the PSD2, Banks and Payment Providers in the EU will need to unlock access to their customer data via Open APIs

First off, Banks need to begin opening up their customer data to third party providers of financial services, under the XS2A (Access to account) rule. They need to begin offering Open APIs (Application Programming Interface) to the TPPs (Third Party Providers).

This change creates three new types of roles for account and payment service providers –

  1. PISPs (Payment Initiation Service Providers) – who will be initiate online payments on the behalf of consumers which do not need to use existing payment networks and schemes. These will clearly provide new payment options to consumers in areas such as account to account payment transfers and bill pay. Example of a scenario. When a EU customer purchases a product from a retailer sometime in 2018, the retailer can initiate a payment request directly to the consumers Bank (via a secure API call) without going through any intermediaries.
  2. AISPs – (Account Information Service Providers) – who will be able to access customer core banking data and be able to provide value added personal financial management tools such as account aggregation etc.Example of a scenario – An AISP will offer a consumer with multiple banking accounts, a single aggregated view of all those accounts plus value added services such as personal financial management tools using all the transaction & historical data.
  3. ASPSPs (Account Servicing Payment Service Providers) – these are Credit Institutions (Banks that offer multiple services) and Payment Institutions( payment services providers) which are required to offer open APIs to the PSPs and the AISPs. These providers can charge a small price per transaction for the PISPs but not charge differently for payments  initiated through their own products.

The PISPs, AISPs and ASPSPs will all be registered, licensed and regulated by an EU agency – the European Banking Authority (EBA). They will also need be required to negotiate contracts with the individual banks. They will all need to use Strong Customer Authentication (SCA) mechanisms to access customer data thus reducing fraud in PSD2 transactions.

Open Banking via Open APIs..

The use of application programming interfaces (APIs) has been well documented across web scale companies such as Facebook, Amazon and Google. APIs are widely interoperable, relatively easy to create and form the front end of many Digital Platforms. APIs are leveraged to essentially access the core services provided by these platforms and can be used to create partner and customer ecosystems. Leader firms such as PayPal, Amazon & FinTechs such as Square, Mint etc have overwhelmingly used APIs as a way to not only open their platforms to millions of developers but also to offer innovative services. It is anticipated that the high margin services created as a result of PSD2, will include consumer & SME lending, financial advisory, peer to peer payments, crowdfunding, comparison shopping, chatbots etc to creating Banking ‘App Stores’ for widespread download and use. The AISPs and PISPs will definitely target high end margins such as financial advisory and lending.

APIs enable the creation of new business models that can deliver differentiated experiences (source – IBM)

It is expected that the EBA will define standards for the PSD2 Open API encompassing areas such as API definitions for standard banking operations to check account balances, perform transfers, view transaction histories, process payments. Vendors in the API space have already begun offering models for specific banking workflows. Security models for PSD2 should include support for two factor authentication, consent management etc using standards such as OpenID Connect.

Strategic Implications for Banks & Payment Providers..

With PSD2, the European Parliament has adopted the legal foundation of the creation of a EU-wide single payments area (SEPA).  While the goal of the PSD is to establish a set of modern, digital industry rules for all payment services in the European Union; it has significant ramifications for the financial services industry as it will surely current business models & foster new areas of competition. The key message from a regulatory standpoint is that consumer data can be opened up to other players in the payment value chain. This will lead to a clamor by players to own more of the customers data with a view to selling business services (e.g. accurate credit scoring, access to mortgage & other consumer loans and mutual funds etc) on that information.

The top five implications of the PSD2 for Banks will be –

  1. Increased competition for revenues in their existing customer base – It is expected that a whole range of nimble competitors such as FinTechs and other financial institutions will jockey to sell products to bank customers.
  2. Banks that are unable to respond to PSD2 in a nimbler manner will be commodified into utilities – Banks will lose their monopoly on being their customers primary front end. As FinTechs take over areas such as mortgage loans (an area where they’re much faster than banks in granting loans), Banks that cannot change their distribution and product models will be commodified. The challenges start with inflexible core banking systems that maintain customer demographics, balances, product information and other BORT (Book Of Record Transaction) Systems that store a range of loan, payment and risk data. These architectures will slowly need to transition from their current (largely) monolithic architectures to compose-able units. There are various strategies that Banks can follow to ‘modernize the core’. That may be the subject of a followup post.
  3. Lost Revenues – Over time, under PSD2, Banks and Payment providers will lose substantial revenues to the PISPs. The veritable elimination of card surcharges and Interchange Fee Regulation (IFR) for payment transactions using credit cards will not only dis-intermediate but also negatively impact card schemes such as Visa and MasterCard.
  4. A High Degree of IT Spend – To comply with the PSD2, Banks will spend tens to hundreds of millions of dollars implementing Open APIs, retrofitting these on legacy systems and complying with increased security requirements mandated by the PSD2.
  5. Implications for Regulatory Reporting and Risk Management – Clearly the Banks are a disadvantage here compared to the new entrants. The Banks still have to adhere to the Basel frameworks and AML (Anti Money Laundering) controls. The AISPs on the other hand are not subject to any of these restrictions nor do they need to hold capital in reserve.PISPs on the other hand will need to prove access to minimal capital reserves. Both AISPs and PISPs will need to explain their business plans and models clearly to regulators. They will also need to prove that their access to consumer data does not violate the intended use.

Why PSD2 is an Enormous Opportunity for Banks and Payment Providers..

At various times, we have highlighted various business & innovation issues with Banking providers in the areas of Retail Banking, Payment Providers and Capital Markets. Regimes such as PSD2 will compel staid industry players to innovate faster than they otherwise would.

After the PSD2 takes effect, banks face various choices. We can list those into three different strategic options.

  1. Minimally Compliant Banks – Here we should categorize Banks that seek to provide bare bones compliance with the Open API. While this may be the starting point for several banks, staying too long in this segment will mean gradual market share erosion as well as a loss of customer lifetime value (CLV) over time. The reason for this is that FinTechs and other startups will offer a range of services such as Instant mortgages,  personal financial management tools, paperless approval processes for a range of consumer accounts etc. It is also anticipated that such organizations will treat PSD2 as a localized effort and will allocate personnel to the project mainly around the front office and marketing.
  2. Digital Starters -Banks that have begun exploring opening up customer data but are looking to support the core Open API but also introduce their own proprietary APIs. While this approach may work in the short to medium term, it will only impose integration headaches on the banks as time goes on.
  3. Digital Innovators – The Digital Innovators will lead the way in adopting open APIs. These banks will fund dedicated teams in lines of business serving their particular customer segments either organically or using partnerships with TPPs. They will not only adhere to the PSD2 APIs but also extend the spec to create own with a focus on data monetization. Examples of such products and services will include Robo-advisors and Chatbots.

Recommendations for Banks on how to be a Digital Innovator….

In the PSD2 age, financial institutions need to embrace digital technology as a way of disarming competition and increasing their wallet share of customer business. They need to move beyond transactional banking to a customer centric model by offering value added services on the customer data that they already provide. Capabilities such as Customer Journey Mapping (CJM) and Single View of Customer (SVC) are the minimum table stakes that they need to provide.

Demystifying Digital – Why Customer 360 is the Foundational Digital Capability – ..(1/3)

So, the four strategic business goals that Innovators PSD2 compliant need to drive towards in the long run –

  1. Digitize The Customer Journey –  Bank clients who use services like Uber, Zillow, Amazon etc in their daily lives are now very vocal in demanding a seamless experience across all of their banking services using digital channels.  The vast majority of Bank applications still lag the innovation cycle, are archaic & are separately managed. The net issue with this is that the client is faced with distinct user experiences ranging from client on-boarding to servicing to transaction management. Such applications need to provide anticipatory or predictive capabilities at scale while understand the specific customers lifestyles, financial needs & behavioral preferences. 
  2. Provide Improved Access to Personal Financial Management (PFM) Tools & Improved Lending Processes  –  Provide consumers with a single aggregated picture of all their accounts without customers needing to engage a TPP (Third Party Provider). Also improve lending systems by providing more efficient access to loans by incorporating a large amount of contextual data in the process.
  3. Automate Back & Mid Office Processes Across Lending, Risk, Compliance & Fraud – PSD2 will force substantial compliance costs on the regulatory arena. The needs to forge a closer banker/client experience is not just driving demand around data silos & streams themselves but also forcing players to move away from paper based models to more of a seamless, digital & highly automated model to rework a ton of existing back & front office processes. These processes range from risk data aggregation, supranational compliance (AML,KYC, CRS & FATCA), financial reporting across a range of global regions & Cyber Security. Can the Data architectures & the IT systems  that leverage them be created in such a way that they permit agility while constantly learning & optimizing their behaviors across national regulations, InfoSec & compliance requirements? Can every piece of actionable data be aggregated, secured, transformed and reported on in such a way that it’s quality across the entire lifecycle is guaranteed? 
  4. Tune Existing Business Models Based on Client Tastes and Feedback – While the initial build out of the core architecture may seem to focus on digitizing interactions and exposing data via APIs. What follows fast is strong predictive modeling capabilities working at large scale where systems need to constantly learn and optimize their interactions, responsiveness & services based on client needs & preferences. 

Recommendations for Payment Service Providers on how to be a Digital Innovator….

Banks must revise their Payments Strategy and adopt six components to be successful as an Everyday Payments provider in the new regulatory environment:

  1. Frictionless and integrated payments –  working with interested 3rd parties in facilitating multimode payments through a variety of front ends
  2. Payments Ecosystems – Payment providers should work on creating smart ecosystems with TPPs that not only offer payment services but also leverage their knowledge of customers to offer value added tools for personal financial planning
  3. Real time Payments innovation – driving realtime cross border payments that are seamless, reliable, cost effective for both corporates and individuals
  4. Customer Data Monetization, Payment providers have been sitting on petabytes of customer data and have only now began waking up to the possibilities of monetizing this data. An area of increasing interest is to provide sophisticated analytics to merchants as a way of driving merchant rewards programs. Retailers, Airlines and other online merchants need to understand what segments their customers fall into as well as what the best avenues are to market to each of them. E.g. Webapp, desktop or tablet etc. Using all of the Payment Data available to them, Payment providers can help Merchant Retailers understand their customers better as well as improve their loyalty programs.
  5. Enhancing the Digital experience in corporate payments – Using the learnings from the more dynamic consumer payments spectrum, payment providers should offer their business clients the same experience in a range of areas such as wire transfers, cash management services using mobile devicesThe below blogpost provide more reading around the capabilities payment providers need to develop in the Digital arena.

Conclusion..

With the PSD2, EU Banks and Payment service providers will need to accelerate the transition to a customer oriented mindset. They will being pushed to share data through open standards, become highly digitized in interacting with consumers and will need to begin leveraging their first mover advantage. They need to use the vast internal data (about customers, their transaction histories, financial preferences, operational insights etc) to create new products or services or to enhance the product experience.

References..

[1] Andy Haldane: ‘Banking may be on the cusp of an industrial revolution – http://www.wired.co.uk/article/a-financial-forecast-from-the-bank-of-england

[2[ PSD2 EU Directive – PSD2 – EU Directive 2015/2366

A Reference Architecture for The Open Banking Standard..

This is the second in a series of four posts on the Open Banking Standard (OBS) in the UK. This second post will briefly look at the strategic drivers for banks while proposing an architectural style or approach for incumbents to drive change in their platforms to achieve OBS Compliance. We will examine the overall data layer implications in the next post. The final post will look at key strategic levers and possible business models that the standard could help banks to drive innovation towards. 

Introduction…

The Open Banking Standard will steward the development of layers of guidelines (API interoperability standards, data security & privacy and governance) which primarily deal with data sharing in banking. The belief is that this regulation will ultimately spur open competition and unlock innovation. For years, the industry has grappled with fundamental platform issues that are native to every domain of banking. Some of these include systems are siloe-d by function, platforms that are inflexible in responding to rapidly changing market conditions & consumer tastes. Bank IT is perceived by the business to be glacially slow in responding to their needs.

The Open Banking Standard (OBS) represents a vast opportunity for banking organizations in multiple ways. First off, Bank IT has the luxury of using the regulatory mandate to slowly re-architect hitherto inflexible and siloe-d business systems. Secondly, doing so will enable Banks to significantly monetize their vast data resources in several key business areas.  

This will need to change with the introduction of Open Banking Standard. Banks that do not change will not be able to derive and sustain a competitive advantage. PSD2 Compliance (Payment Systems Directive – 2) – which will be mandated by the EU is one of the first layers in the OBS. Further layers will include API standards definitions for business processes (e.g View Account, Transfer Funds, Chargebacks, Dispute Handling etc). 

The OBWG (Open Banking Working Group) standards include the following key constituencies & their requirements [1] – 

 1. Customers: defined as account holders & businesses who agree to sharing their data & any publishers who share open datasets 

2. Data attribute providers: defined as banks & other financial services providers whose customers produce data as part of daily banking activities 

3. Third parties: Interested developers, financial services startups aka FinTechs, and any organisations (e.g  Retail Merchants) who can leverage the data to provide new views & products  

It naturally follows from the above, that the key technical requirements of the framework will include:

1. A set of Data elements, API definitions and Security Standards to provide both data security and a set of access restrictions 

2. A Governance model, a body which will develop & oversee the standards 

3. Developer resources, which will enable third parties to discover, educate and experiment.

The Four Strategic Drivers in the Open Bank Standard …

Clearly the more intelligently a firm harness technology (in pursuit of OBS compliance goals) will determine it’s overall competitive advantage.  This important to note since a range of players across the value chain (the above Third Parties as designated by the standard) can now obtain seamless access to a variety of data. Once obtained the data can help the Third Parties reimagine it in manifold ways. For example they can help consumers make better personal financial decisions for their clients at the expense of the Banks owning the data. For instance, FinTechs have generally been able to make more productive use of client data. They do this by providing clients with intuitive access to cross asset data, tailoring algorithms based on behavioral characteristics  and by providing clients with a more engaging and unified experience.

So, the four strategic business goals that OBS compliant architectures need to solve in the long run – 

  1. Digitize The Customer Journey –  Bank clients who use services like Uber, Zillow, Amazon etc in their daily lives are now very vocal in demanding a seamless experience across all of their banking ervices using digital channels.  The vast majority of Bank applications still lag the innovation cycle, are archaic & are separately managed. The net issue with this is that the client is faced with distinct user experiences ranging from client onboarding to servicing to transaction management. Such applications need to provide anticipatory or predictive capabilities at scale while understand the specific customers lifestyles, financial needs & behavioral preferences. 
  2. Provide Improved Access to Personal Financial Management & Improved Lending Processes  –  Provide consumers with a single aggregated picture of all their accounts. Also improve lending systems by providing more efficient access to loans by incorporating a large amount of contextual data in the process.
  3. Automate Back & Mid Office Processes Across Lending, Risk, Compliance & Fraud – The needs to forge a closer banker/client experience is not just driving demand around data silos & streams themselves but also forcing players to move away from paper based models to more of a seamless, digital & highly automated model to rework a ton of existing back & front office processes. These processes range from risk data aggregation, supranational compliance (AML,KYC, CRS & FATCA), financial reporting across a range of global regions & Cyber Security. Can the Data architectures & the IT systems  that leverage them be created in such a way that they permit agility while constantly learning & optimizing their behaviors across national regulations, InfoSec & compliance requirements? Can every piece of actionable data be aggregated,secured, transformed and reported on in such a way that it’s quality across the entire lifecycle is guaranteed? 
  4. Tune Existing Business Models Based on Client Tastes and Feedback – While the initial build out of the core architecture may seem to focus on digitizing interactions and exposing data via APIs. What follows fast is strong predictive modeling capabilities working at large scale where systems need to constantly learn and optimize their interactions, responsiveness & services based on client needs & preferences. 

The Key System Architecture Tenets…

The design and architecture of a solution as large and complex as a reference architecture for Open Banking is a multidimensional challenge and it will vary at every institution based on their existing investments, vendor products & overall culture. 

The OBS calls out the following areas of data as being in scope – Customer transaction data, customer reference data, aggregated data and sensitive commercial data. A thorough review of the OBWSG standard leads one to suggest a logical reference architecture as called out below.

Based on all the above, the Open Bank Architecture shall – 

  • Support an API based model to invoke any business process or data elements based on appropriate security  by a third party . E.g client or an advisor or a business partner
  • Support the development and deployment of an application that encourages a DevOps based approach
  • Support the easy creation of scalable business processes (e.g. client on boarding, KYC, Payment dispute check etc) that natively emit business metrics from the time they’re instantiated to throughout their lifecycle
  • Support automated application delivery, configuration management & deployment
  • Support a high degree of data agility and data intelligence. The end goal being that that every customer click, discussion & preference shall drive an analytics infused interaction between the Bank and the client
  • Support algorithmic capabilities that enable the creation of new services like automated (or Robo) advisors
  • Support a very high degree of scale across many numbers of users, interactions & omni-channel transactions while working across global infrastructure
  • Shall support deployment across cost efficient platforms like a public or private cloud. In short, the design of the application shall not constrain the available deployment options – which may vary because of cost considerations. The infrastructure options supported shall range from virtual machines to docker based containers – whether running on a public cloud, private cloud or in a hybrid cloud
  • Support small, incremental changes to business services & data elements based on changing business requirements 
  • Support standardization across application stacks, toolsets for development & data technology to a high degree
  • Shall support the creation of a user interface that is highly visual and feature rich from a content standpoint when accessed across any device

 

Reference Architecture…

Now that we have covered the business bases, what foundational technology choices comprise the satisfaction of the above? Lets examine that first at a higher level and then in more detail.

Given the above list of requirements – the application architecture that is a “best fit” is shown below.

Open Banking Architecture Diagram

                   Illustration – Candidate Reference Architecture for the Open Bank Standard

Lets examine each of the tiers starting from the lowest –

Infrastructure Layer…

Cloud Computing across it’s three main delivery models (IaaS, PaaS & SaaS) is largely a mainstream endeavor in financial services and no longer an esoteric adventure only for brave innovators. A range of institutions are either deploying or testing cloud-based solutions that span the full range of cloud delivery models. These capabilities include –

IaaS (infrastructure-as-a-service) to provision compute, network & storage, PaaS (platform-as-a-service) to develop applications & exposing their business services as  SaaS (software-as-a-service) via APIs.

Choosing Cloud based infrastructure – whether that is secure public cloud  (Amazon AWS or Microsoft Azure) or an internal private cloud (OpenStack etc) or even a hybrid approach is a safe and sound bet for these applications. Business innovation and transformation are best enabled by a cloud based infrastructure – whether public or private.

 

Data Layer…

While banking data tiers are usually composed of different technologies like RDBMS, EDW (Enterprise Data Warehouses), CMS (Content Management Systems) & Big Data etc. My recommendation for the OBSWG target state is largely dominated by a Big Data Platform powered by Hadoop technology. The vast majority of initial applications recommended by the OBSWG call out for predictive analytics to create tailored Customer Journeys. Big Data is a natural fit as it is fast emerging as the platform of choice for analytic applications.

Financial services firms specifically deal with manifold data types ranging from Customer Account data, Transaction Data, Wire Data, Trade Data, Customer Relationship Management (CRM), General Ledger and other systems supporting core banking functions. When one factors in social media feeds, mobile clients & other non traditional data types, the challenge is not just one of data volumes but also variety and the need to draw conclusions from fast moving data streams by commingling them with years of historical data.

The reasons for choosing Big Data as the dominant technology in the data tier are the below – 

  1. Hadoop’s ability to ingest and work with all the above kinds of data & more (using the schema on read method) has been proven at massive scale. Operational data stores are being built on Hadoop at a fraction of the cost & effort involved with older types of data technology (RDBMS & EDW)
  2. The ability to perform multiple types of processing on a given data set. This processing varies across batch, streaming, in memory and realtime which greatly opens up the ability to create, test & deploy closed loop analytics quicker than ever before
  3. The DAS (Direct Attached Storage) model that Hadoop provides fits neatly in with the horizontal scale out model that the services, UX and business process tier leverage. This keeps cuts Capital Expenditure  to a bare minimum.
  4. The ability to retain data for long periods of time thus providing WM applications with predictive models that can reason on historical data
  5. Hadoop provides the ability to run a massive volumes of models in a very short amount of time helps with modeling automation
  6. Due to it’s parallel processing nature, Hadoop can run calculations (pricing, risk, portfolio, reporting etc) in minutes versus the hours it took using older technology
  7. Hadoop has to work with existing data investments and to augment them with data ingestion & transformation leaving EDW’s to perform complex analytics that they excel at – a huge bonus.

Services Layer…

The overall goals of the OBSWG services tier are to help design, develop,modify and deploy business components in such a way that overall WM application delivery follows a continuous delivery/deployment (CI/CD) paradigm.Given that WM Platforms are some of the most complex financial applications out there, this also has the ancillary benefit of leaving different teams – digital channels, client on boarding, bill pay, transaction management & mid/back office teams to develop and update their components largely independent of other teams. Thus a large monolithic WM enterprise platform is decomposed into its constituent services which are loosely coupled and each is focused on one independent & autonomous business task only. The word ‘task’ here referring to a business capability that has tangible business value.

A highly scalable, open source & industry leading platform as a service (PaaS) is recommended as the way of building out and hosting banking business applications at this layer.  Microservices have moved from the webscale world to fast becoming the standard for building mission critical applications in many industries. Leveraging a PaaS such as OpenShift provides a way to help cut the “technical debt” that has plagued both developers and IT Ops. OpenShift provides the right level of abstraction to encapsulate microservices via it’s native support for Docker Containers. This also has the concomitant advantage of standardizing application stacks, streamlining deployment pipelines thus leading the charge to a DevOps style of building applications. 

Further I recommend that service designer adopt such an approach that the applications are microservices native. This implies a deployment approach similar to a SaaS model where capabilities can be exposed via  APIs.

Now, the services tier has the following global responsibilities – 

  1. Promote a Microservices/SOA style of application development
  2. Support component endpoint invocation via standards based REST APIs
  3. Promote a Cloud, OS & ,development language agnostic style of application development
  4. Promote Horizontal scaling and resilience

Predictive Analytics & Business Process Layer…

Though segments of the banking industry have historically been early adopters of analytics, areas being targeted by the OBSWG – Retail lines of business &Payments have generally been laggards. However, the large datasets that are prevalent in Open Bank Standard world as well as the need to drive customer interaction & journeys, risk & compliance reporting, detecting fraud etc calls for a strategic relook at this space. 

Techniques like Machine Learning, Data Science & AI feed into core business processes thus improving them. For instance, Machine Learning techniques support the creation of self improving algorithms which get better with data thus making accurate business predictions. Thus, the overarching goal of the analytics tier should be to support a higher degree of automation by working with the business process and the services tier. Predictive Analytics can be leveraged across the value chain of the Open Bank Standard – ranging from new customer acquisition to customer journey to the back office. More recently these techniques have found increased rates of adoption with enterprise concerns from cyber security to telemetry data processing.

Another area is improved automation via light weight business process management (BPM). Though most large banks do have pockets of BPM implementations that are adding or beginning to add significant business value, an enterprise-wide re-look at the core revenue-producing activities is called for, as is a deeper examination of driving competitive advantage. BPM now has evolved into more than just pure process management. Meanwhile, other disciplines have been added to BPM — which has now become an umbrella term. These include business rules management, event processing, and business resource planning.

Financial Services firms general are fertile ground for business process automation, since most managers across their various lines of business are simply a collection of core and differentiated processes. Examples are private banking (with processes including onboarding customers, collecting deposits, conducting business via multiple channels, and compliance with regulatory mandates such as KYC and AML); investment banking (including straight-through-processing, trading platforms, prime brokerage, and compliance with regulation); payment services; and portfolio management (including modeling model portfolio positions and providing complete transparency across the end-to-end life cycle). The key takeaway is that driving automation can result not just in better business visibility and accountability on behalf of various actors. It can also drive revenue and contribute significantly to the bottom line.

A business process system should allow an IT analyst or customer or advisor to convey their business process by describing the steps that need to be executed in order to achieve the goal (and explain the order of those steps, typically using a flow chart). This greatly improves the visibility of business logic, resulting in higher-level and domain-specific representations (tailored to finance) that can be understood by business users and should be easier to monitor by management. Again , leveraging a PaaS such as OpenShift in conjunction with an industry leading open source BPMS (Business Process Management System) such as JBOSS BPMS provides an integrated BPM capability that can create cloud ready and horizontally scalable business processes.

API & UX Layer…

The API & UX (User Experience) tier fronts humans – clients. business partners, regulators, internal management and other business users across omnichannel touchpoints. A standards based API tier is provided for partner applications and other non-human actors to interact with business service tier. Once the OBSWG defines the exact protocols, data standards & formats – this should be straightforward to implement.

The API/UX tier has the following global responsibilities  – 

  1. Provide a seamless experience across all channels (mobile, eBanking, tablet etc) in a way that is a continuous and non-siloed. The implication is that clients should be able to begin a business transaction in channel A and be able to continue them in channel B where it makes business sense.
  2. Understand client personas and integrate with the business & predictive analytic tier in such a way that the API is loosely yet logically integrated with the overall information architecture
  3. Provide advanced visualization (wireframes, process control, social media collaboration) and cross partner authentication & single sign on
  4. Both the API & UX shall also be designed is such a manner that their design, development & ongoing enhancement lends themselves to an Agile & DevOps methodology.

It can all come together…

In most existing Banking systems, siloed functions have led to brittle data architectures operating on custom built legacy applications. This problem is firstly compounded by inflexible core banking systems and secondly exacerbated by a gross lack of standardization in application stacks underlying capabilities like customer journey, improved lending & fraud detection. These factors inhibit deployment flexibility across a range of platforms thus leading to extremely high IT costs and technical debut. The consequence is that these inhibit client facing applications from using data in a manner that constantly & positively impacts the client experience. There is clearly a need to provide an integrated digital experience across a global customer base. And then to offer more intelligent functions based on existing data assets. Current players do possess a huge first mover advantage as they offer highly established financial products across their large (and largely loyal & sticky) customer bases, a wide networks of physical locations, rich troves of data that pertain to customer accounts & demographic information. However, it is not enough to just possess the data. They must be able to drive change through legacy thinking and infrastructures as things change around the entire industry as it struggles to adapt to a major new segment – the millenials – who increasingly use mobile devices and demand more contextual services as well as a seamless and highly analytic driven & unified banking experience – akin to what they commonly experience via the internet – at web properties like Facebook, Amazon, Google or Yahoo etc

Summary

Platforms designed technology platforms designed around the four key business needs   will create immense operational efficiency, better business models, increased relevance and ultimately drive revenues. These will separate the visionaries, leaders from the laggards in the years to come. The Open Bank Standard will be a catalyst in this immense disruption. 

REFERENCES…

[1] The Open Banking Standard –
https://theodi.org/open-banking-standard

The Open Banking Standard – The Five Major Implications for UK Banks..

“Banking as a service has long sat at the heart of our economy. In our digitally enabled world, the need to seamlessly and efficiently connect different economic agents who are buying and selling goods and services, is critical. The Open Banking Standard is a framework for making banking data work better: for customers; for businesses and; for the economy as a whole.” – OBWG (Open Bank Working Group) co-chair and Barclays executive Matt Hammerstein

Introducing Open Banking Standards…

On a global basis, both the Financial Services and the Insurance industry are facing an unprecedented amount of change driven by factors like changing client preferences and the emergence of new technology—the Internet, mobility, social media, etc. These changes are immensely profound, especially with the arrival of  the “FinTechs”—technology-driven applications that are upending long-standing business models across all sectors from retail banking to wealth management & capital markets. Complement this with members of a major new segment, Millennials. They are increasingly use mobile devices, demanding more contextual services and expecting a seamless unified banking experience—something akin to what they  experience on web properties like Facebook, Amazon, Uber, Google or Yahoo, etc.  These web scale startups are doing so by expanding their wallet share of client revenues by offering contextual products tailored to individual client profiles. Their savvy use of segmentation data and predictive analytics enables the delivery of bundles of tailored products across multiple delivery channels (web, mobile, call center banking, point of sale, ATM/kiosk etc.).

Supra national authorities and national government in Europe have taken note of the need for erstwhile protected industries like Banking to stay competitive in this brave new world.

With the passage of the second revision of the ground breaking Directive on Payment Services Directive (PSD-2),  the European Parliament has adopted the legal foundation of the creation of a EU-wide single payments area (SEPA)[1].  While the goal of the PSD is to establish a set of modern, digital industry rules for all payment services in the European Union; it has significant ramifications for the financial services industry as it will surely current business models & foster new areas of competition. While the PSD-2 has gotten the lions share of press interest, the UK government has quietly been working on an initiative to create a standard around allowing Banking organizations to share their customer & transactional data with certified third parties via an open API.  The outgoing PM David Cameron’s government had in fact outlined these plans in the 2015 national budget.

open-bank-project

The EU and the UK governments have recognized that in order for Europe to move into the vision of one Digital Market – the current system of banking calls for change. And they foresee this change will be driven by digital technology. This shakeup will happen via the increased competition that will result as various financial services are unbundled by innovative developers. To that end, by 2019 – all banks should make customer data – their true crown jewels – openly accessible via an open standards based API.

The Open Bank Working Standard Report API…

 The U.K. has been working on an open standard for its financial system for nearly a year. The Open Bank Working Group (OBWP) was created to set standards how banking data should created and accessed openly. This initiative covers the following broad areas – Data Standards, API Standards & Security Standards to protect consumers while spurring innovation via open competition.

Open_Banking_Scope

Illustration: Components of the Open Banking Standard (ref – OBWG Working Group)

Under the Open Banking Standard – expected to be legal reality over the next 2-3 years, any banking customer or authorized 3rd party provider can leverage APIs to gain access to their data and transactions across a whole range of areas ranging from Retail Banking to Business Banking to Commercial Banking.

Open Standards can actually help banks by helping them source data from external providers. For instance, the Customer Journey problem has been an age old issue in banking which has gotten exponentially more complicated over the last five years as the staggering rise of mobile technology and the Internet of Things (IoT) have vastly increased the number of enterprise touch points that customers are exposed to in terms of being able to discover & purchase new products/services. In an OmniChannel world, an increasing number of transactions are being conducted online. In verticals like Retail and Banking, the number of online transactions approaches an average of 40%. Adding to the problem, more and more consumers are posting product reviews and feedback online. Banks thus need to react in realtime to piece together the source of consumer dissatisfaction.  Open Standards will help increase the ability of banks to pull in data from external sources to enrich their limited view of customers.

The Implications of Open Bank Standard…

The five implications of Open Bank Project –

  1. Banks will be focused on building platforms that can drive ecosystems of applications around them.  Banks have thus far been largely focused on delivering commodity financial services using well understood distribution strategies. Most global banks have armies of software developers but their productivity around delivering innovation has been close to zero. Open APIs will primarily force more thinking around how banking products are delivered to the end consumer. The standards for this initiative are primarily open source in origin, though they’re widely accepted across the globe – REST,OAuth etc.
  2. However it is not a zero sum game, Banks can themselves benefit by building business models around monetizing their data assets as their distribution channels will go global & costs will change around Open Bank. To that end existing Digital efforts should be brought in line with Open Bank Standard  The best retail banks will not only seek to learn from, but sometimes partner with, emerging fintech players to integrate new digital solutions and deliver exceptional customer experience. To cooperate and take advantage of fintechs, banks will require new partnering capabilities. To heighten their understanding of customers’ needs and to deliver products and services that customers truly value, banks will need new capabilities in data management and analytics. Using Open Bank APIs, developers across the world can create applications that offer new services (in conjunction with retailers, for example), aggregate financial information or even help in financial planning. Banks will have interesting choices to make between acting as Data Producer or Consumer or Aggregator or even a Distributor based on specific business situations.
  3. Regulators will also benefit substantially by using Partner APIs to both access real time reports  & share data across a range of areas. The lack of realtime data access across a range of risk, compliance and cyber areas has been a long standing problem that can be solved by an open standards based API framework [2].  E.g.  Market/Credit/Basel Risk Based Reporting, AML watch list data and Trade Surveillance etc.
  4. Data Architectures are key to Open Bank Standard –  Currently most industry players are woeful at putting together a comprehensive Single View of their Customers (SVC). Due to operational data silos, each department possess a siloe-d & limited view of the customer across multiple channels. These views are typically inconsistent, lack synchronization with other departments & miss a high amount of potential cross-sell and up-sell opportunities. Data lakes and realtime data processing techniques will be critical to meeting this immense regulatory requirement.
  5. Despite the promise, large gaps still remain in the Open Bank Project. Critical areas like project governance, Service Level Agreements (SLA) for API users in terms of uptime, quality of service are still left unaddressed.

 Open Banking Standard will spur immense changes..

Prior to the Open Banking Standard, Banks recognize the need to move to a predominantly online model by providing consumers with highly interactive, engaging and contextual experiences that span multiple channels—branch banking, eBanking, POS, ATM, etc. Business goals are engagement & increasing profitability per customer for both micro and macro customer populations with the ultimate goal of increasing customer lifetime value (CLV). The Open Banking Standard brings technology approaches to the fore in terms of calling it out as a strategic differentiator.  Banks need to move to a fresh business, data and process approach as a way of staying competitive and relevant. Done right, Open Bank Standards will help the leaders cement their market position.

REFERENCES…

[1] The Open Banking Standard –
https://theodi.org/open-banking-standard

[2]Big Data – Banking’s New Weapon Against Financial Crime – http://www.vamsitalkstech.com/?p=806