According to McKinsey & Co., “Open Banking can be defined as a collaborative model in which banking data is shared through APIs between two or more unaffiliated parties to deliver enhanced capabilities to the marketplace.” It sounds easy enough, particularly since the UK’s Open Banking Working Group (founded in 2015) established a framework for data sharing, security, and consumer protection in the modern era. The resulting Open Banking Standard establishes how banking data will be shared through secure open application programming interfaces (APIs), allowing consumers and business customers to more effectively manage their wealth.
The Legacy Roadblock
However, the path to frictionless banking has a formidable roadblock: legacy systems. Developed and maintained by banks for decades, legacy systems contain the financial and customer data that is the lifeblood of Open Banking. Financial companies spent an estimated $261 billion on technology in 2018, with 67% of that dedicated to maintaining older systems — amounting to nearly $175 billion that instead could be invested in building the seamless, frictionless financial experiences consumers and business users are starting to demand.
Fintechs are burdened by legacy technology, too. They are inserting themselves into an enormous universe of financial applications, which forms multiple domain- and process-specific Application Ecosystems that overlap and interconnect. As such, every interaction that fintechs make with financial institutions and payments infrastructure is mired in inefficiency introduced by legacy systems.
Today, legacy data is typically accessed by building point-to-point connections between systems using APIs. In this decades-old integration paradigm, applications are connected to allow back-and-forth data transfer.
Why One-to-One Connectivity Isn't Feasible in an Open Banking Future
- The connections allow data to be shared between two applications but not multiple processes.
- The connections are brittle and can be easily broken by even minor changes (such as updates and bug fixes) in either application.
- The ability for applications to share data is subservient to the idiosyncrasies of how they are connected.
The Solution: Data Virtualization
Instead of traditional point-to-point connectivity, a more modern approach puts the data model at the center of application integration. This is accomplished by virtualizing the data; at Cloud Elements, we do this with constructs called Virtual Data Resources (VDRs) that can be reused innumerable times. VDRs provide a standardized view of data while eliminating the need for it to be mapped point-to-point to each new application that is integrated.
Data virtualization effectively untethers the prize of data accessibility from the tedium of application integration; thousands of application endpoints can be mapped to a common data model. This scalability eliminates the need to implement and maintain hundreds of static point-to-point connections for each application, including legacy financial systems.
How to Achieve Open Banking
In an Open Banking environment, an effective API integration platform provides a straightforward way to leverage both old and new applications. For example, the figure below illustrates how key corporate banking functions can interact freely, creating Virtual Data Resources that can be securely accessed by all participants.
The Benefits of an API Integration Platform for Banks and Fintechs
- Build integrated, high-performance Application Ecosystems
- Automate manual processes and eliminate the tedium of manual file formatting
- Seamlessly access banking services and synchronize data with third-party back-office applications
- Create frictionless new services that monetize data in new ways, creating new revenue streams
- Modernize corporate (and consumer) banking data exchange across all solutions
- Enable straight-through real-time processing
- Provide partners (and other fintechs) with a consistent way to write to APIs
- Accelerate the flow of cash through the system, unleashing new efficiencies
Enabling Application Ecosystems
Data sharing is the essence of any Application Ecosystem, and Virtual Data Resources are a groundbreaking and essential enabling technology. VDRs are delivered through an equally innovative new approach to application integration; rather than using highly inefficient point-to-point integration methods, data virtualization is accomplished through an API integration platform that unifies APIs, allowing developers to easily make any and all applications work together. The API integration platform must be able to accommodate the connectivity of legacy data systems, new fintech applications, and everything in between.
To learn more about how data virtualization and API integration can help your organization take a giant step toward Open Banking, read our new whitepaper, “Modernizing Data in the Financial Application Ecosystem.”