The electrical wall socket was rolled out on a broad scale in the 1920s, and almost everything went wrong. The US solution was supposed to prevail to become the world standard, but it was deemed too wobbly and unsafe. 15 different international standards quickly came into being and, despite intense efforts, were never harmonized. Rectifying that today is practically impossible because the existing infrastructure – all of the wall sockets and plugs – would have to be replaced. A similar situation faces the financial industry: open banking – i. e. the secure, standardized exchange of client data between banks and accredited third-party providers (TPPs) initiated by the client – is currently gaining a foothold worldwide. The Financial Times even calls open banking “the quiet digital revolution.” But as was the case with electrical wall sockets, a profusion of different open banking standards and solutions are popping up. In the EU, a guideline called the Payment Services Directive (PSD2) stipulates what data financial institutions have to share, but not how the exchange of data is to be carried out. In Asia, there has been a wild proliferation of different interfaces. In the USA, banks have developed their own customized solutions together with their partners. And the UK has enacted its own open banking legislation on top of the PSD2 rules in force there.
API stands for application programming interface. APIs enable TPPs to utilize bank clients’ account data and banking functions in connection with those accounts.
PSD2 stands for the second EU Payment Services Directive, which has been in force since January 2018. PSD2 envisages, among other things, opening the banking market to TPPs in the area of payment transaction services. Banks are required by law to have implemented the PSD2 rules by mid-September 2019.
TPP stands for third-party provider. TPPs are generally non-bank financial institutions that are granted regulated access to bank clients’ accounts (via APIs, for example).
The Digital Key
The problem isn’t a trivial one. Wherever new services come into being and align with consumer interest, they increasingly often require banking or insurance data independent of where the bank account or policy resides, be it for automatically synchronizing and reconciling bank accounts with accounting programs, for example, or for executing a payment transaction via a mobile solution. All of these situations necessitate an interface – a kind of plug-and-socket connection – that transfers the data securely, reliably, and quickly.
APIs have established themselves as the modus operandi for this type of digital interface. API stands for “application programming interface.” Examples are Apple and Google, which use APIs to define the way in which apps from third-party developers have to communicate with iPhone or Android operating systems. In a world where more and more systems “talk” to each other, APIs are “key to successful digital transformation,” Business Insider writes. “In the future, APIs will continue to play the crucial role in communication between different digital systems,” says Cornelius Dorn, Head Strategy & Business Development in the Banking Services business unit of SIX. “But,” he adds, “a situation where every single financial institution builds a proprietary API for the same business features has to be avoided as much as possible.” Otherwise, a scenario similar to the “electrical wall socket” story would loom, though this time within Switzerland, he explains. Dorn, who is also involved in the Open Banking Working Group set up by the Swiss Bankers Association (SBA), warns of an API jungle that would severely slow innovation in Switzerland.
The innovation argument is particularly dear to Dorn, who holds a Ph.D. in engineering. He explains that many young FinTech companies “mainly solve isolated single problems and do that really well, often better than traditional financial institutions can. But end customers seldom benefit from this – no one loads 15 apps on a smartphone that each master only a single service element and are not integrated.” Traditional financial institutions, for their part, would have difficulty quickly adding new, external solutions because their business models are complex and their infrastructures have grown complicated over the years.
What is to be done, then? In the early days of digitalization, incumbent Swiss financial institutions had plenty of reservations about disruptive FinTechs, which is not a promising strategy, as the media sector illustrates, for instance. Some publishing houses rejected the new products and distribution channels and missed the boat as a result. But most banks and insurers shed their initial skepticism relatively quickly. As early as in 2016, Credit Suisse Switzerland CEO Thomas Gottstein declared that the bank was applying the “frenemies” principle, turning rivals into business partners. “Young upstarts are working together with traditional institutions like ourselves,” he disclosed.
The Clock Is Ticking
But how far does the cooperation between the old financial world and the new one go? Do financial institutions run the risk of selling off their crown jewels – their client relationships and data – or even being compelled to give them away like in the EU under PSD2? The Swiss business newspaper Handelszeitung recently wrote that a specter is haunting the European banking world – “the specter of open banking.” Banks, it reported, are going to great lengths in an effort not to lose contact with their end customers after the forced opening of the banking market to non-bank financial institutions. “Banks that take part in open banking as first movers can gain a lot,” says e-commerce project head Nicolas Guillet from Abacus, the company behind the eponymous all-in-one ERP solution and the operator of Abaninja.ch, a cloud-based invoicing tool for SMEs. José Fernández, the director of partner management at digital office administration solutions supplier Klara.ch, adds: “By actively participating in the ecosystem, banks can collaboratively develop new business models.”
“Incorporating services from third parties meets customers’ desire for integrated solutions,” SBA President Herbert Scheidt confirmed recently in an interview. “The SBA sees great potential in open banking for Switzerland’s financial industry,” he said, but it “opposes a government-imposed, one-sided opening of access rights to third parties analogous to what the EU’s PSD2 directive requires.”
Cornelius Dorn is convinced that the clock is ticking for the Swiss financial industry. “If we don’t take action ourselves to devise innovative solutions, our financial institutions risk getting crowded out of the market by the US technology giants.” In fact, Apple, Google, and the like are increasingly encroaching on the territory of banks and insurers, often using payment solutions as a gateway. Facebook, for instance, just recently announced plans to launch its own global currency, called Libra, next year. The California-based social media company has held a banking license since 2016.
The Petri Dish of Banking
So, to enable Switzerland’s financial center to enter the open banking era as efficiently as possible, SIX has developed a uniform data exchange platform – without any regulatory compulsion and in alignment with the needs of clients, banks, TPPs, and other potential participants. “The platform from SIX will set the standards for efficient open banking in the Swiss financial center,” Dorn says, “and at the same time will guarantee all participants a high level of security.”
The platform will link the different participants via standardized APIs in a way that will enable them to develop new, innovative, user- friendly solutions and to get them to customers more easily. “It is also intended to be kind of like a petri dish for cultivating ideas and business models,” Dorn explains. Other approaches are also being pursued in Switzerland, he says, “but the platform from SIX is currently the only solution being offered by a centralized infrastructure service provider. Moreover, it eschews shortcuts like ‘screen scraping,’” a process of automatically capturing screen display data that some companies are forced to resort to if there are no interfaces available. Screen scraping has a bad reputation; it is generally considered error-prone and is frequently misused by hackers.
Another advantage of the platform from SIX is that “it can be adapted to any international standards that emerge,” Dorn adds. “That way we would make it easier for even small, highly specialized Swiss startup companies to sell their services internationally.” In April, the Handelszeitung hailed the solution from SIX, which will be rolled out initially to corporate clients, as a “milestone” for open banking in Switzerland. The platform went into pilot operation in July (see box below).
In an extensive report on open banking, McKinsey & Company wrote that change is rarely comfortable, but the forces of change are inevitable. “Banks are better served getting ahead of and defining the trend rather than waging a futile battle to repel it.”
Open Banking for Switzerland from SIX
SIX is bringing open banking to Switzerland on a broad scale. “With its platform, SIX will become a central hub for the sharing of data in the banking sector,” says Marco Menotti, Head Banking Services at SIX. “With it, we are laying the foundation for our platform users’ innovative products and supporting Switzerland as a financial center.” The platform went into pilot operation with Credit Suisse, UBS, and the two third-party providers (TPPs) Abacus and Klara.ch in July 2019. SIX is initially testing two services. An account information service gives TPPs access to bank account data in order to synchronize and reconcile it with companies’ accounting software. A payment service enables TPPs to automatically initiate their corporate clients’ payments at the corresponding bank. The clients then just have to release them. “We are guided by the needs of the market and our clients,” Menotti says, “and will continue to add new use cases.” The platform is scheduled to go into regular operation at the start of 2020.