Navigating the Open Banking Landscape: Technologies and Strategies for Transformation

Open banking, also known as open finance, is transforming the banking industry with financial institutions embracing greater transparency and collaboration, while also driving product innovation. In fact, the number of individuals utilising open banking services is expected to reach 132.2 million this year – a trend which is already stimulating competition, and encouraging more partnerships between traditional banks and fintech companies.

The core of open banking involves using common protocols to share financial data and services with 3rd parties. However, this comes with challenges. These include managing data in dynamic environments and adapting to evolving standards where banks and third-party providers (TPPs) face the challenge of developing multiple versions of APIs to integrate with different institutions. In turn, flexible data platforms play a crucial role with many open banking standards recommending that the open APIs be RESTful and support JSON data formats. These platforms facilitate data modeling and management, reduce development efforts with features like low-code data exposure APIs, and ensure compatibility during database upgrades. These capabilities are essential in helping financial institutions and TPPs navigate the changing landscape of open banking.

One notable instance of these technologies in action is Natwest, a major UK bank. Natwest significantly increased its API calls, enhanced customer data insights, and strengthened privacy protocols – all by adopting flexible data management. In the fast-paced world of open banking, performance and scalability are key, so technologies capable of managing high transaction volumes and meeting regulatory service level agreements are vital. Features like advanced storage engines and efficient data compression, along with cloud-based solutions for intelligent indexing and workload isolation, are also instrumental in this regard.

The transition to open banking

There are four key components in the transition to open banking: scalability, availability, security, and activity monitoring. To provide customers with seamless integration and real-time data delivery, it's crucial to have technologies that support real-time data and event processing. However, delivering data in real-time can present challenges.

With scalability, issues arise due to unpredictable workloads from TPPs. However, the way around this is by implementing a system that can allow for both vertical and horizontal scaling (known as sharding) as this also ensures that high transaction volumes can be managed effectively. In addition, cloud-based solutions offer auto-scaling capabilities, which provide flexibility and allow them to accommodate changing demands seamlessly.

Next, with TPPs offering round-the-clock services, banking APIs must be consistently available, even during maintenance periods. A solution to this is cloud-based database services with multi-node clusters and multi-cloud capabilities. This can help ensure high availability and fault tolerance, crucial for 24/7 banking operations. At the same time, it is within these 24/7 operations that activity monitoring and troubleshooting are vital, so that financial institutions can maintain a secure and robust open banking infrastructure.

Here, tools that enable granular tracking of system activity and application events, along with cloud-based services for administration and performance optimisation, are important for effective management. On this front, analytics and visualisation capabilities are beneficial for financial institutions to gain insights into their operations, eliminating the need for traditional business intelligence tools.

Finally, the issues of security and privacy are paramount in open banking. Solutions that provide advanced encryption mechanisms, both for data-at-rest and in-transit, are necessary to safeguard shared data. Additionally, compliance with data privacy laws like GDPR requires fine-grained access control and encryption techniques, including field-level encryption and geo-sharding for data residency compliance.

The success of financial institutions in the open banking sector relies on adopting technologies that can handle dynamic environments, unpredictable workloads, scalability, availability, security, and privacy challenges. By leveraging these technological solutions, financial institutions can adeptly navigate the open banking landscape, fostering innovation and delivering superior customer experiences in the digital era.