[Column] Danie Thom: Open source and the rise of Open Banking
It is said that the future of finance belongs to fintech. Innovations outside of traditional banking systems have forced established financial institutions to begin embracing disruptive technologies such as mobile payments, marketplace lending, AI-powered credit scoring models, and even blockchain and distributed ledger-based transactions. The world of finance is undergoing true digital transformation, which the pandemic has only served to accelerate, but there is another tectonic shift in the making.
In recent years, the concept of ‘Open Banking’ (also referred to as ‘open financial data’) has emerged, and as it gains global traction it could promise to reshape the global finance ecosystem entirely. The core tenet of Open Banking is that customers should be the owners of their data – not the institutions they entrust it with – and this data should therefore be accessible to third-party platforms of their choice, who can then provide more competitive offerings to their benefit. Provided with customer accounts and data – with the customer’s consent – third-party financial service providers can offer tailored products and services, simplify banking processes and transfers, improve the accuracy of risk evaluation, and even reduce fraud.
The legacy dilemma
One of the main challenges of Open Banking isn’t a regulatory one. For Open Banking systems to become more widely adopted, hundreds of different financial platforms and third-party entities need to be able to integrate and exchange data. But many long-established financial institutions still rely on legacy systems built on proprietary models that were not designed to integrate with other financial networks and platforms.
Traditional banking built on siloed legacy systems has been restrictive for both banks and their customers. Customers can often only interact with only one financial institution at a time, whereas banks have a very limited view of their customers. With no centralised or ‘open’ banking model, banks cannot gain valuable insights from having a full picture of their customers, nor can others compete to find the best financial products and services for them.
Banks stuck with legacy systems are also finding it very difficult to integrate the old with the new to keep up with the pace of fintech innovation. As the banking industry shifts steadily towards platform banking models, banks are now recognising the urgent need for modern IT infrastructure that is not only robust but can also integrate seamlessly with other systems. The proprietary solutions banks have been using over the years often lack either modern functionality or cross-compatibility with different environments. That is where open source can provide a solution.
Open for innovation
The open source approach resolves many of the technical challenges to Open Banking. When built on open standards, open source software provides banks with a consistent framework from which they can easily build, scale, or integrate their legacy systems with new and different platforms. Open source even helps banks with cloud migration since most of the global public cloud workload runs on Linux.
Together with a vibrant fintech developer community, financial institutions are participating in a thriving open source ecosystem where they can leverage existing code and industry best practises to accelerate their Open Banking journey. The collaborative nature of open source reduces the time it takes for banks to adopt or develop industry-leading products and services, which is essential in the digital banking age, but also gives banks more freedom to customise and improve their systems without having to worry about proprietary restrictions, high licence fees, or vendor lock-in.
Open source code relies on a global feedback system where a vast number of end users and developers are constantly monitoring projects and making improvements. Security and compliance are a top priority for banking institutions, and now many are embracing open source for its robustness and transparency. And with blended IT architecture that employs an open source cache layer, banks can tap into the power of open source without exposing their core systems to the world.
The future of finance
In the future, Open Banking may become a matter of regulatory compliance, and it should also be seen as an opportunity for banks to free themselves from the constraints of siloed legacy systems. The finance industry is on a sure course towards rapid digitalisation, and it might not be long before a traditional approach to software development is unable to keep up.
While many years ago some banks were hesitant about an open source approach, it is now becoming standard practise for navigating the regulatory and technical challenges of Open Banking. Open source allows established financial institutions to become more agile and innovative and, in today’s evolving fintech environment, those who don’t embrace it might be left behind.