Open Banking: Looking to a Secure Future

The winds of change are blowing through Switzerland’s financial sector: inspired by the regulated open banking movement in the euro area, fintechs, neobanks and other non-financial-sector players are all courting customers with the latest cutting-edge solutions. Interest groups from the software and banking industries in several EU member states have promoted the establishment of customer interfaces with financial institutions and enabled standardised access for third-party providers (TPPs). There is concern in some quarters that regulation could hamper the sector’s momentum, however a transparent capital market with a standardised environment combining international trends with the strengths of the Swiss financial market offers immense opportunities for growth.

Openness strengthens the banks’ hand

The greatest challenge lies in remoulding the ideology of the Swiss banking industry, whose success has traditionally been rooted in discretion. True to its name, open banking actively promotes the opening-up of the business model and the integration of TPPs; this means institutions potentially stand to lose their direct interface with the client. But surely this is also an opportunity to show agility, embrace innovation, and generate added value for customers? And to respond more nimbly on the market with an enhanced portfolio of services, thus boosting competitiveness? Adopting such an approach could also be positive image-wise for banks, as customers appreciate seeing a pipeline of new and attractive digital services coming on stream. They would begin to see previously monolithic institutions as more progressive – as exhibiting more of the innovative characteristics of startups.

Open banking allows TPPs to address modern customers’ requirements by delivering highly specialised services; importantly, they will often meet these needs in a more user-friendly and efficient manner than the banks themselves, who will benefit from an unprecedented partner eco-system and new revenue streams. There is no reason why the banks of the future should not operate an attractive business model brimming with innovation and agility – all thanks to open banking.

Technical success factors

E-banking security mechanisms cannot simply be grafted onto open banking, as entire companies will have to be authenticated, not just individual users. This means that in-house IT infrastructure will have to be properly equipped to accommodate interfaces, IT security must be a given, and liability issues relating to TPPs will have to be settled clearly in advance. Solid IT business architecture with smart interfaces (APIs) is a sine qua non – API gateways are essential for connecting large numbers of TPPs.

This process obviously involves some risks, too. Banks wish to monitor the effects on their core business and customers will want to decide for themselves who can access their data and to what end. Fast, secure and straightforward user journeys will be significant success factors here. Fintechs want to create as many “basic services” as possible in order to add their own value. Quite where the “sweet spot” (where banks can also maximise their ROI) lies, remains to be seen. The standardised development and definition of interfaces for TPPs represents one plausible avenue, which could unlock Switzerland’s innovative potential and take it to the next level as a financial services hub.

The rights and obligations of TPPs are also yet to be established. Liability resides entirely with the banks in the EU, but financial institutions in Switzerland are digging in their heels against a wholesale adoption of such a regulation; this is the principle reason why open banking is still stuck in second gear in our country.

Bank to the future

An exemplary model exists in the UK where the open banking API standard applies to far more than just payment transactions and covers all services that are relevant from a customer’s perspective. There is a regulated ecosystem of some 200 actors, from TPPs to account providers and major banks. The figures reflect high user acceptance: more than 1.25 billion API calls were placed and processed in 2019 alone. Close collaboration between regulators and market participants has been key to this success. A durable and sustainable public-private partnership has permitted the UK, alone amongst EU countries, to declare a single technological standard to be mandatory – with resounding success.

When will Switzerland’s financial services sector follow suit?

The Swiss still have a long way to go compared to the UK, but voluntarily opening up interfaces certainly represents a great opportunity to proactively help shape the financial market. Individual banks have spotted this potential and have already implemented such a policy with success, managing to establish a reliable partner ecosystem based on their existing IT environment. Several TPPs are also backing this approach and have lost no time in bringing their innovative services to market, hoping that such a combination will yield more efficient work processes, greater customer satisfaction, and profitable sources of revenue. These players are naturally also benefiting from the reputational upside of being “first movers”. Whether we like it or not, open banking is set to have long-term consequences for the financial markets, so let’s stay “open” to the future.

Open banking in Switzerland – an overview

There are currently eight different initiatives promoting the establishment of open banking in Switzerland. Follow this link for an overview

Ergon is a founding partner of OpenBankingProject.ch.