Why Open Banking Might Need to Rely on a Magic Illusion of 24x7 Availability
The adage “the more things change, the more they stay the same” appears to ring true when applied to the early phases of the evolution of open banking (or open payments). Especially when you contrast it with the early days of ATM withdrawals; particularly those made in the dead of night so you could pay cash for your after-party greasy feast.
Both scenarios require that a real-time balance is available to ensure that cleared funds are honored. Decades ago, consumer demand for accessible after-hours cash was resolved through the illusion of real-time account availability, made possible by clever systems like BASE24, which safely managed balances even when old-fashioned account systems retired overnight to attend to their batched-up housekeeping duties.
That illusion has been perpetuated over the last couple of decades, and it appears that the same magic is now needed by banks obligated to provide 24/7 real-time balance data to third parties in new Open Banking initiatives. That’s because many banks’ modern Open Banking capabilities, delivered using new technology constructs like Application Programming Interfaces (APIs) and real-time payments, are still dependent on core banking systems with the same old limitations.
Real-time authorization for the digital era
It is an interesting paradox that many of the world’s biggest retail banks (and indeed a fair proportion of disruptive new banks) are investing in user experience-driven banking apps to support always-connected users – but taking the capabilities of core accounting systems for granted. New, easy-to-use, front-end apps are important, obviously, but it is a mistake to view the core authorization systems just as rather boring ‘back office’ overheads. These services are a crucial piece of the ‘always connected’ design goal, and to offering high levels of personalization.
The modern requirement for personalization builds on traditional authorization functions (i.e. “is the card valid?” “are there sufficient funds?) by layering on extra preferences, such as the ability to turn accounts on/off, creating geographical blocks and restricting usage by retailer segment. Further checks need to be made to avoid fraud and to comply with new regulations relating to authentication requirements, where multi-factor authentication (beyond traditional card and PIN) needs to be executed.
New “authentication ceremonies” will need to be supported – allowing consumers to approve transactions using safe and secure methods that feel most natural. These are needed when a consumer accesses a bank directly using the bank’s own services. But they are also needed for indirect access, for example, when a consumer uses a third-party provider’s app to access the bank via new Open Banking APIs. Modern authorization and authentication systems are anything but ‘back office’ – they are about to become major customer service differentiators.
Understanding Open Banking transactions flows – what happens when it goes wrong?
The new world of Open Banking promises new innovative services, offered by both new companies and by established brands now able to aggregate information from consumers’ multiple bank accounts and to initiate payments on their behalf. However, there are some uncertainties in these new transaction scenarios – not a great surprise given the new and radical nature of some of these interactions, which is giving rise to varying interpretations of public policy and regulatory statements.
Arguably, new payment flows might be simpler; real-time (immediate) payments as an alternative to cards carry the promise of lower costs, faster settlement and no provision for disputes and chargebacks. But normal people can make mistakes and queries, so disputes and correction facilities will inevitably need to be provided. In the card payments world, the ownership of liability and risk for these scenarios is clearly prescribed by the card schemes. But, in the world of Open Banking, these operational support facilities still need to evolve.
The existence of equivalent rules and policies in card payments ensures the continued use of cards as the default payment rails – at least until we see improved definitions for liability ownership within the real-time and open payments market.
What new magic is needed to deliver modern Open Banking?
So, is a 24/7 illusion still needed in the era of modern open banking?
It seems evident (and somewhat surprising) that many contemporary financial institutions are still not operating truly 24/7 core processing systems. There are exceptions, particularly among the new breed of start-up banks dotted around fintech capitals of the world, but in general the need for a resilient proxy to manage real-time balance information still exists.
It may no longer be sufficient to stick to the old magic tricks, however. In addition to the basics of safe transaction authorization, modern transaction handling systems need to step up to the challenges of strong authentication, the complex logic of personalized financial services and being able to handle alternative payment methods.
It may be appealing to dispense with the magic and go to the core of the problem – upgrading existing banking systems to become genuinely real time. This can be a high-risk strategy though, fraught with existential dangers that go beyond the world of payments. It’s also a high cost, long term option. Tricky, if business needs to keep their options open as consumer opinions (and the actions of regulators) start to shake out.
The real trick is to make sure that customers get what they want. No one needs to believe in magic for this to work – you just need to recognize that magical things can happen if you get the payments story staged right.
View our infographic, which outlines a real-time balance use case that meets Open Banking requirements.
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