Open banking is a system and a process that opens traditional banking interfaces to third-party financial and non-financial service providers. In a sense, open banking transforms traditional banking into a banking as a cloud using open application programming interfaces (APIs). This article provides a comprehensive introduction to open banking. There are also many fintech startups that have bloomed due to open banking. Open banking has also motivated legislators to modernize and regulate open banking. For instance, the European Union’s Second Payment Services Directive (PSD2) providing the regulation and legal platform to enable open banking in the payments industry.
In this article let us look at open banking as a banking cloud platform. We can view a cloud platform from two perspective: (1) as a consumption model and (2) as a productivity model. As a consumption model a cloud platform provides computing, storage, and networking as services. We pay for what we consume. Much of the revenue for a cloud provider comes from the consumption model. For a cloud consumer, the consumption model transforms their capital expense (capex) into an operational expense (opex). The expectation is that the operational expense is cheaper for most companies than capital expense.
As a productivity model, the cloud providers provide a marketplace with a suite of tools for cloud consumers to consume the cloud platform. The productivity tools are enablers or catalysts for adoption of consumption of cloud services.
The banking cloud can also be enabled as a consumption and as a productivity model. Open banking enables banking as a cloud platform. The banking cloud compute services are money deposit (accounting balance sheet) and the customer base. The banking cloud storage services are databases and data warehouses that store critical banking data. The banking cloud networking services are transactions and movement of money. All these banking cloud services are the consumption model for banking as a cloud. There are several banking cloud productivity tools that enable core banking cloud services. These include services like KYC (know you customer), regulation services, real-time end user alerts, finance planning, data privacy and governance services. Open Banking API enables banking as a cloud model.
Over the years banks have transformed themselves due to regulations, technology advancements and customer expectations. But the basics of banking has not changed. Banking is based on two foundational principles: Exploiting asset-liability mismatch and liquidity risk management. There are two main functions in banking: taking deposits from people and institutions and loaning to people and institutions. Depositors want to deposit money for a short term and loaners want to loan for a long term. Therefore, banking is provisioning of loans and deposits; the loans produce income for the bank, while the deposits create expense for the bank. The banks acts as a broker between borrowers and lenders.
The above notion of deposits is like creating data centers with hardware and software (virtual hardware) assets (deposits) needed to drive the business. These hardware and software (deposits) are part of the cloud providers’ liabilities (in their accounting books). The notion of loans is loaning the compute, storage, and networking to generate revenues. There are many intermediary service providers who buy cloud providers’ deposits and create new intermediary services that are like options and derivatives. These intermediaries depend on cloud providers’ APIs to enable value-add intermediary services to end customers. Just as we have risk in financial derivatives, we will have risks when these intermediary services.
Open banking APIs is foundation for building banking as a cloud. It is important bring the principles of cloud computing to banking and other financial institutions. Open banking makes banking as a public banking cloud. Once we conceptualize this notion of open banking as banking cloud, we can then bring agile and devops (development and operations) principles, microservices architecture, consumption-based models, etc. into banking cloud. We can then build embedded finance and invisible banking in a Clean Architecture way. We can bring domain-driven design principles to develop banking cloud services. At Kyndryl we are exploring Banking as a Cloud where we can bring cloud principles to transform and modernize banking system. Please reach out to me if you want to discuss banking as a cloud concept.