Regulation and innovation are two words not often heard together, but with open banking this is exactly the case. For those not yet familiar, open banking is the result of two pieces of recently introduced financial regulation – the Competition and Market Authority’s ‘Open Banking Remedy’ and the revised European Payment Services Directive (PSDII).

The purpose of this regulation is, essentially, to create more competition in the financial market and provide better services for consumers by introducing more ‘open’ data sharing mechanisms. Some would say that through these regulations banking is getting democratised.

With this new regulation, financial services firms are now required to make it possible for customer data to be shared more easily with third parties online and to allow third parties to initiate payments directly from a person’s account as a bank transfer.

>See also: Open banking: the quiet revolution

The technology that will make all of this possible is an open API (Application Programming Interface), which allows businesses to seamlessly and securely link their services together to create an improved user experience.

Starting a revolution

Many are saying that open banking has the potential to start a revolution in financial services. It’s already inspiring hackathons and prizes for open banking developers, with one commentator going so far as saying Britain can lead the world in this ‘app-based drive to change the face of banking.’

Banks and financial services firms are beginning to see the opportunities this presents, and that by partnering with third parties they can develop new business models and provide improved services to their customers.

Very few people use banking services on a daily basis and banks risk being left behind as customers look elsewhere for their financial services.

When purchasing a new car for example, customers no longer consider bank loans as car companies themselves now offer finance deals. With open banking, banks have the opportunity to provide new services that go far beyond their core offering.

>See also: 5 key recommendations for open banking access

Just as Facebook, Amazon and Google have continually broadened their services and become a daily part of our lives, banks must also look at how they can foster closer, more meaningful relationships with their customers.

Some organisations are already way ahead of the curve, such as Standard Chartered with its open API Developer Portal and the Central Bank of Ireland adding Facebook Payments International Limited to its roster of digital payment providers.

While this is certainly a positive move that will encourage innovation and competition in the industry, some financial firms still have work to do in order to make this possible.

Putting data first

Banks are beginning to realise that the way they organise and use customer data will be core to their future and their ability to compete in a tough market. When you consider that most banking is now done digitally, data is central to everything these organisations do, from providing online services to communicating with their customers.

As financial services move towards an open banking model, where there is a clear mandate for data to be made accessible upon request, the importance of this commodity is only increasing and banks are coming under pressure to accelerate their digital transformation plans.

So what steps should banks take in order to prepare for this change and support new models of doing business? The first step is to ensure their IT infrastructure is ‘data-centric’ – this means being able to efficiently organise vast amounts of structured and unstructured data.

>See also: Rise of the collaborative open bank

Second, they will need real-time analytics that can derive valuable insights from this data. After all, what use is data without insight? With advanced data analytics and now with machine learning tools available to augment this, data can be analysed at speed to drive better decision making and improved personalisation.

Third, secure and open APIs will be needed to seamlessly integrate with and tap into a broader ecosystem of partners – whether that is developed in-house or with a third party.

With the introduction of open banking businesses are seeing a win-win situation for banks and customers alike. It’s driving innovation for banks and encouraging the development of additional and improved services for customers.

It is certain to drive competition and ensure banks remain relevant in an increasingly digital world. Before banks can truly take advantage of this new model however, they will first need to ensure that their operational data (ware)houses are in order.

Sourced by Raoul van Engelshoven, VP for banking and financial markets in Europe, IBM

UPDATE: The Open Banking initiative: One year on – what’s changed and what can we expect?