Open finance: the industry continues to make good progress
Richard Hess, Head of Digitalisation at the Swiss Bankers Association (SBA), discussed open finance with Roger Wisler for this edition of insight. Roger is Senior Business Project Manager for Open Banking & API Product Management at Zürcher Kantonalbank and is also head of the SBA Open Banking working group (an unsalaried position).
Roger, can you describe open finance in just one sentence?
Generally speaking, open finance refers to the opening-up of the value chain in the financial sector based on the standardised and secure exchange of data between banks, insurers and trusted service providers from other industries.
And why is that important?
It’s particularly relevant for Switzerland. The preliminary phase of this process, open banking, mainly involves payment systems, such as checking your account balance via a third-party provider or making payments directly from your current account. The concept of open finance goes further than that, and extends to additional services in areas such as mortgages and insurance. However, open finance is much more than simply a technical opening-up of the proprietary system architecture. The focus of these new business models is always on the customer’s needs. The aim is to involve customers more closely, for example through a financial institution integrating the value-added services of third-party providers directly in its own product and service offering. The shift towards open banking and open finance is therefore primarily a strategic move that requires a clear management commitment. This process also needs clear rules and standards so as to ensure secure and standardised communication between all stakeholders. The linchpin here is the Application Programming Interface, API. In this way, Internet technology is increasingly making an impact in the financial sector as well.
What does that mean for Swiss customers in concrete terms?
Basically, open finance allows customers to access innovative services. Here ‘open’ refers to the interaction between financial institutions, third-party providers and customers. With the open finance approach, the customer no longer has to access financial services from just one source (as in the classic bank-customer relationship), but from several different service providers. Apart from banks, these providers can also be fintech or wealthtech firms, or service providers from other industries. Internet-only banks (‘neobanks’) could be another option. That’s not the key issue, however. Customers are not interested in whether open banking or open finance will become mainstream. Their main concern is to have integrated and secure financial services wherever and whenever they need them. So in future the question will be: which financial services, in what form and through which provider? Also, going by the market research, open finance will be more of a halfway house, while far more integrated ecosystems lie ahead. So in future, financial institutions must be able to take a 360-degree view of their customers in order to offer the best products and services to suit their personal circumstances.
That all sounds very exciting in theory. But how much of that is already reality? What role does open finance play in your own work, for example?
You could say it’s part of my daily business. At Zürcher Kantonalbank I’m looking at the whole question of governance and areas where we can improve technical interfaces for the core business. I also support, as best I can, ongoing projects with specialist knowledge from the communities.
Are there also risks associated with open finance, especially regarding data security?
Certainly. But not simply because of opening up transactions. Every point where data are shared also poses data security risks. The key question should be: is everyone aware of the risks, and how do we deal with them? The reality is that customers essentially trust their bank to manage their data safely according to the principle of good faith. Customers have the same expectations where third parties are concerned. So there has to be clear awareness – especially among customers – of the risks linked to banks sharing data with other external service providers. Obviously banks will screen these providers very carefully. Ultimately, however, it’s up to the individual customer to decide whether their data should be shared with third parties, by giving their explicit consent.
Can you give us an idea of the progress Swiss banks are making in their strategy and approach?
From my experience with my last employer, I can say that banks are investing a lot of time and effort on the controlled opening-up of customer data. A decision will therefore be made on a case-by-case basis about which ‘use cases’ are appropriate for their core business.
Where do you see the biggest challenges at present to advancing open finance in Switzerland?
As Switzerland takes a market-driven approach rather than applying regulations, financial institutions need to ask themselves whether, and how, they stand to benefit from open finance. This requires management to make open finance a strategic anchor point and to apply it in practice in a top-down manner. The Swiss Bankers Association has already produced excellent documentation on the individual strategies which every bank can draw on as reference material [see Common APIs for Open Banking].
What role does the Swiss Bankers Association play in all of this?
The SBA has recognised that the financial industry needs a recommendation not just on strategy, but also on the pooling of expertise. Its role is therefore more as an enabler and coordinator. The objective is to create the most favourable conditions possible for banks to be able to work together seamlessly and securely with each other, as well as with other service providers in the market. For this reason, the SBA works to clarify the potential legal or security issues that would facilitate effective collaboration within the industry and with third-party providers.
So what concrete issues are currently being tackled?
Our Open Banking working group is addressing relevant topics that should support the ecosystem between the fintech and banking worlds. The recent publication on open finance fundamentals and API initiatives clearly sets out the allocation of roles between national stakeholders and the interface with international stakeholders [see allocation of roles]. Apart from role allocation, there are also a number of technical and legal questions. The technical aspects include the actual standardisation of APIs and also security concepts. These fundamentals must be well coordinated with all market players. We are therefore working closely with other actors in the ecosystem. On the legal front, the priority is to ensure legal certainty and trust in all stakeholders.
What’s your goal by the end of this year?
The priority has to be for open finance to make further progress in Switzerland and for there to be more new ‘use cases’.
Finally: if you had one wish that would help advance open finance in Switzerland that could be granted tomorrow, what would that be?
(laughs) It would have to be that banks especially recognise the importance of open finance and start to implement the concept.
Roger, thanks for talking to us!