Sponsored Open banking is the latest development in the digitalisation of banking. It’s aimed at allowing customers to gain a clearer view of their finances, and regulators in markets such as the EU and the UK are driving this change. In the US, banks are adopting open banking themselves based on the opportunity. Either way, it means that banks should open up their data and APIs to third parties. It means consumers gain greater transparency and financial service providers, fintechs and banks alike, have greater opportunity to develop innovative products.
That’s the theory, so what does it mean in practice? It means that a consumer with a few current accounts can pull all their data into a money management app, such as Revolut or Yolt. The app then gives them a complete view of their budgeting and spending and, by applying intelligence to the data, can also give advice and suggestions to improve their financial health.
It means lending can be more quickly and easily facilitated, with real-time credit decisions being possible, and that the current complex online payment system - which necessitate going through WorldPay and other payment gateways - can be simplified. As Lance Homer, global head of digital payments and banking ecosystem at Equinix, puts it: “It means the consumer can leverage their data in a way that’s meaningful to their lives.”
Open banking is a global development, mandated by regulation in some parts of the world - in the EU there’s the revised payment services directive or PSD2 and in the UK the Competition and Markets Authority (CMA) has set up Open Banking. But elsewhere in the world it’s driven by the urge to innovate.
Who will be successful?
So while open banking is a global initiative, its drivers vary, and some observers comment that those banks who view it as more than a compliance issue will be more successful. Homer adds: “The banks are giving third parties access to information, but they can be considered a third party themselves and aggregate in other banks’ data. There's also the opportunity for them to create premium APIs that go above and beyond what the regulators require. The banks who look to leverage this opportunity to connect in new ways with their customer base, or acquire new customers, or work with third parties and partners, will be the ones who succeed.”
The development of open banking has lots of implications for banking tech. It means banks and financial services providers must have the right architecture to support their services, especially in terms of networking and security, and which supports the need to integrate with different partners. Although many mainstream banks have spent time and money in the last few years adjusting their tech stacks, they typically remain mainframe-based, highly reliable systems built for transaction processing. Open banking is more focused on highly connected systems of intelligence that are available to counterparties to access with low latency in a secure environment that extends to the network edge. Some banks are more ready than others. By contrast, young, more nimble businesses, like fintechs looking to develop innovative financial services, tend to be born in the cloud.
And while open banking is centred on the banking and fintech community, some very big ancillary players are keeping a close eye on developments and making sure they’re ready to play at critical points in the ecosystem. In January, for example, Visa paid a hefty $5.3 billion for Plaid, a Silicon Valley fintech. Plaid is an API aggregator – with banks all developing their own APIs, a fintech might have to integrate differently into all the banks it wants to work with, but Plaid allows it to use just one API.
In its infancy
Open banking is still in its infancy and very much at the stage of proof of concept, MVP (minimum viable product) and beta versions - even though the CMA has required that the UK’s nine largest banks allow licensed third parties to access transaction data for the past two years, according to Adrian Mountstephens, head of business development, payments and banking at Equinix. “As the market matures, we all know that that there isn’t a bank that will offer services to customers without building in resilience, security and scale. It means the bank has to turn its open banking services into IT projects, which then need investment in infrastructure to deliver those services.”
Equinix has been interconnecting companies and helping them share data since 1998, says Lance Homer, who cites its mission as one to protect, connect and empower mission-critical infrastructure for digital commerce. As a network neutral colocation provider, Equinix sits at the intersection of the financial services, cloud, ecommerce, network providers and internet search providers that consumers use.
The company now has about 1,250 financial services customers, including hundreds of banks, as well as “all the major cloud service providers that the banks use for hybrid multicloud infrastructures. This means it is well placed to help banks and fintechs overcome the issues of open banking. It can help to ensure security and regulatory requirements are met, monitor, control and maintain performance, and provision and deploy virtual infrastructure as quickly as is needed.
Says Mountstephens: “As we move from beta and pilots and MVPs to scale, we can provide the architecture, and normally for banks, we would do it twice. We build in the resilience that we all take for granted when we swipe our cards, and everything works. The reason digital payments always work is because the infrastructure is resilient and geographically diverse.”
The security and resilience of private connectivity
A fintech connection to a bank may start with a proof of concept over the public internet, an API call between the bank and the fintech, and for regulatory purposes that may be all that’s required, says Homer. But banks want private connectivity, a dedicated circuit that that's not on the public internet, and this is where Equinix comes in, helping to connect banks to cloud providers and fintechs. He adds: “A bank might need help from Equinix to architect into the cloud, because it’s using some machine learning in the Google Cloud, for example. It needs to extend its network from a data centre at Equinix into the Google Cloud, securely and reliably, and without that network touching the public internet.”
A common scenario for Equinix would be to work with a bank to connect to a fintech to offer an open banking service, the fintech might be in AWS, but the bank will want to connect by two routes - via London and Amsterdam perhaps, so that the service never fails. This is where Equinix’s strength lies, says Homer, as it has the expertise and resources to scale ideas and proof of concepts. “We secure the data, we take it off the public internet, and we build in resilience so that service will be protected by multiple SLAs and will always be on.”
Equinix Cloud Exchange Fabric allows any customer on the fabric to interconnect to another Equinix customer in minutes. “A bank in London can turn up private connectivity to a fintech with Equinix in Silicon Valley in under a minute, with just a few keystrokes,” says Homer. And because it’s private, it’s reliable, scalable, and dynamic, and security threats are minimised.
Equinix offers other services that can be leveraged by banks and fintechs for open banking initiatives. Its SmartKey secure key management and cryptography service for example, ensures data protection across any cloud architecture, and its network edge services allow its customers to deploy virtual network infrastructure inside Equinix, such as virtual firewalls. Says Homer: It may be that you’re a born-in-the-cloud fintech and you’re not ready to become a full-time colo customer, with boots on the ground in different markets. But you may be able to use a virtual router in a market like Singapore from London - then Equinix can turn that up.”
Mountstephens says that Equinix is unusual among data centre providers in its ability to provide subject-matter experts to assist and advise its customers - it has a team of presales advisors who help the open banking community to architect the complex hybrid multicloud solution they need.
“We walk alongside our customers and make decisions together. We act as trusted advisors to our customers, working on their products day to day. It’s one of the most important reasons for people to choose to work with us. We give them resilience, and we reduce the cost of their network because we give them a networking platform that’s much easier and faster to deploy than through a traditional MPLS route or a carrier. And then we give them the performance they need for the applications they want to run across the architecture.”
Sponsored by Equinix