By Mark White, Senior Manager – Financial Markets and Fintech, Telehouse
Regulation has been a key driver of transformation in banking and the catalyst for many of the innovations in place today. Open banking has emerged from the likes of PSD2 an EU Directive, administered by the European Commission to regulate payment services and payment service providers throughout the EU and European Economic Area (EEA). This new banking practice has already proved to be a major trigger of further change.
However, preparing for open banking is going to require significant investment in infrastructure and data but time is running out if banks want to gain competitive advantage So where should they start?
Scoping the challenge
A key requirement for banks and other financial services providers is they need to support the open banking APIs and connectivity from external providers to their own architecture as well as ensure data is in a format that can be shared. That’s absolutely critical, especially given the need for collaboration between different industries such as finance and telecoms, for example, that open banking will give rise to.
The challenge is the enormity of the task ahead – many banks are simply not ready to adopt open banking practices, let alone the subsequent open finance requirements. Often, that is down to the systems and infrastructure that they still have in place today.
Many banks still run with legacy-type environments and use old mainframe systems that may even date back to the 1980s or 1990s. While they have often made piecemeal changes here and there, these modifications have typically been reactive rather than proactive. In a sense, the banks have been playing catch up. While investments have been made in technology, the problem is this has not always been sufficient to keep pace with the ever-evolving banking environment.
That makes it difficult to work with new open standards and be flexible enough to adapt to their requirements around connectivity and data sharing.
There are positive signs, however, that this is starting to change. Requirements from open banking, and in particular regulations like PS2 and The Competition and Markets Authority’s (CMA’s) order for open banking, are triggering transformation.
This is a drive that comes from policymakers. They are forcing banks to start changing their IT systems and architecture. Unfortunately, it’s an enormous task requiring significant investment in infrastructure and data. They have had to begin making changes to their core systems. They have had to start putting application programming interfaces (APIs) in place to support the many connections from third party providers and from their own customers that open banking necessitates.
It is costing banks a lot of money to develop these APIs, and that upfront cost is a significant challenge itself. There has also been considerable work and investment put in place around data to make sure it is secure and ready to be shared in the right way through APIs.
Despite the cost, though, preparing the IT systems infrastructure properly is an absolute prerequisite. Open banking could take off quickly and if banks don’t have the right IT and security protocols in place, they could suddenly be at risk of a compliance shortfall.
Finding a solution
As with any regulatory mandate, managing ongoing costs will inevitably be an important factor. Although open banking could move suddenly, it might also stagnate and so banks will want to avoid wasting upfront investments in tools that are, ultimately, not required. What they need is the ability to adapt quickly and meet the requirements of open banking but without ripping and replacing their legacy IT at a high cost.
In this context, banks can gain a lot from colocation. It needs to be delivered by a trusted data centre provider, of course, one which is tried, tested and proven in the industry and one that supports a wide range of connectivity partners. But as open banking evolves, banks will need the flexibility to scale at pace alongside rich market connectivity, and colocation offers the requisite support and scalability – all of which are key features in a field that is moving quickly. And it is scalability across lots of aspects, including connectivity, storage and security.
Both fintechs and banks, large and small, can benefit from this flexibility. It also gives these types of organisations options if open banking does not deliver on its promise. Whatever the future of open banking is, banks will need to be able to act quickly and develop or reduce their current capacity or needs.
Added to this, colocation can also support that collaboration between different industries that we referenced earlier on, enabling fast and even instant connectivity between multiple organisations and industries, including, in this context, fintech and banking.
That, in turn, provides innovation that will also be a key element of open banking as banks look to innovate to meet the new requirements by offering enhanced settlement or clearing services, for example, or by developing new applications. All this will rely on manipulating data and getting data to the destination more quickly and that is something that colocation environments can drive forward and support.