Together with the new Payment Services Directive (PSD2), which opens up regulated third-party access to customer data, and the Payment Access Directive (PAD), which makes it easier to compare bank charges, the new regulations are designed to make banking more competitive and allow providers to offer modern, value-added services to their customers while keeping their data safe.

To quantify the opportunity, one study by PwC estimates that open banking could generate more than £7.2bn by 2022 for banks, fintechs, credit scoring agencies and the tech giants. So what do banks have to do ensure they don’t get left behind?

The size of the prize means new entrants are keen to try their luck at taking market share. But banks have a huge advantage over them as established and trusted players in terms of looking after customers’ assets, including personal data, which they have in abundance.

This is critical because data will be the key to successful open banking. By analysing it, banks will be able to maximise existing revenue streams and create new ones by more easily cross-selling and upselling, and by offering new services with third-party partners such as account aggregation via fintechs and timely and appropriate discounts or offers with retailers.

Done well, it promises to bring back a level of service that bank customers still value and want but that all but disappeared from the industry years ago due to the high cost of providing it. At its heart, open banking is about engendering trust, leveraging personal data and providing great service.

The first thing banks need to do to succeed is to recognise the opportunity and leverage their advantage. To date, too many have seen open banking regulation as a cost–even a threat. GDPR in particular has been viewed as an unnecessary burden thanks to the very fact that the sector has one of the best track records when it comes to keeping customer data safe. This is perfectly illustrated by a recent survey by Accenture that found that the 70 percent of respondents don’t like the idea of using social media channels, for example, to access or communicate with their bank.

Next is to realise that while banks can make open banking work on an old legacy system, the task will be far easier and more efficient with a digital core platform.

The old legacy systems still operated by so many banks run a multitude of databases, each a data silo. The real opportunity in open banking is for banks to be able to access and analyse all of a customer’s data so that it can anticipate and accompany that customer on more of their financial journeys.

At the same time, banks need to be able to store customer consents for data use in a central, easily accessed format. That way, when requests for data are made– perhaps by third-party banks as part of an enhanced service such as account aggregation they can be easily and cheaply fulfilled. Both are far easier with a digital core.

Customers are also becoming increasingly aware of their data protection rights such as data portability where personal data must be presented in a machine-readable format with fines for organisation that fail to do so. A legacy system will have problems finding all the right data and delivering it quickly and efficiently in the right format. But that’s not the only downside: failure or delay will also likely damage a bank’s reputation and there’s the potential to lose business when customers become frustrated at a slow or inefficient service.

Next, banks will need to adopt a data-protection-by-design approach to security and train staff to be data aware. This means building processes that only access and display the data required to perform each task. For example, does a failed payment screen need to identify the customer or just display the account number? This will require thinking about processes and data management to ensure personal data is never accessed unnecessarily. It’s a case of compliance helping to build and reinforce trust.

Similarly, banks will have to work with their third-party partners, those with which they share customer data, to ensure the latter have the right customer consents and that the data is secure. This is where APIs come in.

APIs allow banks to share data and check any GDPR requirement about consent. When it comes to working with merchants, again, an API can share the data securely and check it is shared compliantly.

So banks with a digital core using APIs will be able to take full advantage of the new open banking regulations. And what is more, they will be in pole position to fight off the competition. They will have the technology, the valuable customer data and the public trust to use and share that data–something other providers might lack. This is important because companies that understand how to use data to their advantage–the platform companies like Amazon, Google and Facebook–are likely to pose the biggest threat to banks in the world of open banking. But if the platform companies aren’t yet trusted, banks have a huge advantage–for now.

The post Banks with a digital core using APIs better placed to take full advantage of new open banking regulations appeared first on International Finance.

Can you explain what Basel III is?

Basel III is a package of measures, where a number of ratios in banks will be fixed. This attempt is to make banks take lesser risks, and when they do so, they are adequately capitalized and own enough liquidity. This is required to upgrade the existing banking framework.

The paper I wrote focuses on has one specific component of Basel III – capital requirement and the changes in increasing capital requirements. My paper is one among many papers that identifies the impact of policy interventions. We have tried to analyse empirically the effect of increasing capital requirements and we find that it is good but there are several effects that we have tried to measure.

The capital exercise by EBA is a definitive moment because from an empirical point of view as it allows for the identification of increasing capital requirements, atleast in the short and medium term. We see that banks are increasing capital ratio and reducing risk weighted assets as well as lending to corporates.

The paper is very definite. During this exercise, we observed that banks were shrinking balance sheets; corporate and retail lending did contract in the time window we studied it in.

What is the need for risk-based capital ratio?

The idea is to have capital in banks. Specifically, the goal is to have capital for those categories on the bank balance sheet that are risky as this is where losses will occur and a capital buffer is needed.

What is the EBA Capital Exercise and how does it help banks in the future?

The goal was to increase a bank’s capital ratio. After the 2008 financial crisis, regulators have been trying to make the banking sector safer. It is obviously what the taxpayers want. The EBA exercise shows that large banks have to charge a higher capital ratio as they will be implicitly covered by a too-big-to-fail umbrella. The exercise did this on the basis of market share of each of the countries surveyed and the ability of differently-sized banks that were singled out as too-big-to-fail.

What could this empirical exercise entail for one element of the Basel 3 package – capital ratios?

The exercise seems to suggest that this increase of the capital ratio element may have a contractionary effect on lending to retail and corporate clients. There are many factors to consider – one correctly pointed out by Dr Capuano is that equity markets may be more benign and banks could “raise equity cheaply” in the current period. However, in the long run, this seems also reasonable. Hence, the increase in capital ratio comes at a good time, and phased in a way that the impact on lending could be benign.

There are other measures in Basel III and it is the interaction of measures that literature is currently trying to measure. We haven’t seen a lot of policy packages where a number of measures were jointly introduced. So, the interaction of liquidity and capital ratios is potentially better than other combinations. The introduction of these measures could be that contraction in lending would be mitigated.

How will EBA affect corporate and retail clients?

In the EBA capital exercise, if all capital ratios are set according to risk ways, then it is natural for banks to try and save capital. If you increase capital ratio, where is this going to land if they don’t raise new equity? It will land in those categories whose margins are more capital-expensive. They are more weighted assets. Retail and corporate lending have sizeable risk weights attached to them. If sovereign bonds have low or no risk, it doesn’t have a significant impact on reduction in capital ratio. This is the very mechanism by which potentially that element of Basel III can affect bank balance sheets.

What are your thoughts on Dr. Christian Capuano’s comments on this issue?

His approach is very balanced and to a large extent, we don’t disagree. Our exercise documented further the effect of changing capital ratio on banks. There is a median effect where you would expect it on the margin of reducing lending – regulators across the world while rolling out Basel III are prioritising that banks be made safer, by phasing requirements over time and giving time to the banks to adjust. The EBA exercise is about ratios and opens the door for adjustments on the asset aide of balance sheets for the banks.

If you want a harsher but more effective way, then it would entail imposing an absolute amount of capital change than imposing ratios. This way, a bank cannot work on the asset side of the balance sheet. Forcing banks to raise capital in an equity market, where capital is expensive, especially at the wrong time, is not easy. In that respect, Prof. Capuano’s comments are not all inconsistent with what we find. He says there are possibilities now to raise capital and measures to be eased in medium term. He also says that increases in capital requirements will interact with other Basel III measures, but this needs to be assessed over time and analyses how different measures work together.

Finally, what can banks really do to prepare ahead of the implementation of Basel 3 in 2019?

Basel III is a huge package and banks have to be prepared on many fronts. It is safe to say that this was expected and banks have had some inputs on how this will work in the long run. There is the whole discussion on optimal degree of complexity and it remains to see how it gets executed. Each measure comes with its own set of calculations.

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