IBSi Blogs

The speed of the COVID-19 crisis has shocked us all. Any assessment of the scale of the human tragedy or the impact on the economy risks being out of date in short order. Our financial sector is at the forefront of the COVID-19 impact on the global economy given the integral role financial services play in the economy. For Banks, one conclusion we can make with confidence is that this time is very different from the global financial crisis in 2007-2008.

The COVID-19 crisis is having an immediate impact on the real economy as travel is curtailed and business activity, especially consumer led sectors such as hospitality and travel, has dropped precipitously. In contrast during the crisis of 2007-2008 the broader economy entered a recession due to issues that originated in the financial sector.

The U.S. banking system is significantly stronger than the last crisis with amounts of capital and liquidity far above required regulatory amounts having been built-up since 2007-2008. The U.S. regulators confirm that in the United States “the largest banking organizations hold $1.3 trillion in common equity and $2.9 trillion in high-quality liquid assets (HQLA).” The banks have sufficient capital and liquidity to support their corporate and retail customers through this difficult time (which is what regulators, politicians and the public will expect them to do). Furthermore, some large U.S banks recently announced they will conserve capital by suspending stock buybacks.

Of course, the experience of regulators, banks, and authorities during the last financial crisis has informed a wide range of actions during the last ten years meant to strengthen banks, including stronger capital and liquidity requirements. This has also included a focus on managing the range of operational risks that are critical in dealing with this crisis, including not losing sight of new cyber threats that may surface as a result.

What are U.S. banks doing today? Their most immediate priority is to ensure continued operations of their business by implementing business continuity plans (BCP) lead by senior management. These plans will focus on ensuring the safety of their staff and customers. Key actions given the risk of COVID-19 will include firewall type arrangements such as separating staff into various teams working from different locations and even sub-teams with such mundane arrangements as using different building entrances etc. The investment in duplicate facilities and capacity, enabling banks to continue to operate such activities as trading floors and processing centers, is integral to a robust BCP. Aside from the new physical aspects of operating, banks will also need to address the cultural and behavioral aspects of remote working models at a scale not previously imagined.

Given the immediate impact the COVID-19 crisis is having on the real economy through job losses and business closures, banks have customers who are now unable to make loan repayments and pay credit card bills, etc. The U.S. regulators are encouraging banks to provide relief to individuals whose changed circumstances mean they are unable to service their obligations (this includes not requiring a relaxation of loan terms to trigger a downgrade in the loan classification) or need relief from such charges as early deposit breakage fees and ATM fees. Many companies have a near-term liquidity squeeze that will look to their banks for relief and support.

How will Banks proceed after their near-term crisis management? The direct impact of the COVID-19 crisis and the various actions taken by Central Banks and governments worldwide will have long-term ramifications for Banks. For example, the monetary policy resulting in record low U.S. dollar interest rates will adversely impact the profitability of U.S. banks.

The credit quality of banks’ loan portfolios will deteriorate due to the forecast now of a global recession (S&P Global forecasts effectively zero growth in the U.S. for 2020). The rapid increase in job losses will soon have a material impact on retail credit costs, including mortgages and credit cards. Banks with exposures to companies in the industries most adversely impacted will likely soon experience significant deterioration of their loan portfolios and sharp increases in the cost of credit. For larger companies, their inability to access capital markets will likely increase their reliance on banks for some time to meet their funding needs. While there were already some signs that the 10+ year benign credit cycle was coming to an end, it is almost certain that this will now accelerate, leading to some weaker companies no longer being able to access credit unless there is significant governmental intervention.

Some trends will continue as before this crisis. The investments that banks are making in technology to create a digital environment, including moving more transactions to online banking, will likely accelerate. The “lower for longer” interest rate environment and increasing credit costs mean that improving efficiency will be an even higher priority, including reducing branch footprints and implementing radical new ways of working that won’t require as much commuting to high-rent central business districts. Longer-term, these industry dynamics provide an even greater incentive for increasing the pace of industry consolidation (there are over 5,000 banks in the United States).

Banks in the United States have exceptionally strong balance sheets and liquidity positions. Furthermore they are better prepared than ever operationally to handle this crisis. We are still learning about both the human impact and the impact on the real economy of this crisis. Although, for banks, we already know they are better positioned than ever to fulfill their role in supporting a strong financial system while meeting their customer’s needs during this challenging period.

Mark T. Robinson, a Senior Advisor to Cedar, is a banker with an extensive banking career including as CEO of ANZ EMEA, CEO of Citi South Asia, and, most recently, as CEO of a UAE based bank. He has a BA and MBA from the University of Chicago.

 Coronavirus or COVID 19 has triggered an economic collapse globally over the past few months and experts say that the worst is yet to come! Coronavirus has dealt the last nail in the coffin to an economy already burdened with unprecedented debt levels and company valuations.

The stock markets globally have gone into a freefall with major indices falling between 10-20% in the past couple of weeks, with all major countries entering a bear market (>20% decline from 52 week highs). While the biggest losers have been the tourism, aviation, hotels, energy and leisure sectors, the slump in oil prices has sent shockwaves across a global economy that is already staring down the barrel of a meltdown.

This article attempts to dwell deeper into COVID 19’s impact on the financial sector, more specifically the impact on banks, banking technology companies and fintechs.

Banks, the vital cog to any economy, are facing multifold challenges. While the 2008 financial crisis was attributed to sub-prime mortgage loans and the real estate bubble, it is no secret that the 2020 meltdown will be attributed to unprecedented levels of corporate debt. Let’s lay out some of the key challenges:

1. Significant downturn in bank valuations driven by plummeting stock prices
2. Large drop in transaction volumes among business and retail customers reducing fee and commission incomes
3. Pressure on net interest margin, arising from multiple reductions in interest rates by central banks globally
4. Adverse impact on credit quality and rising NPAs initially triggered by ‘zombie companies’ and then SMEs. The impact will be magnified by companies operating in ‘code-red’ sectors such as tourism, aviation, leisure, energy and oil and gas which can result in mass bankruptcies, unemployment and negative economic growth

The chart below takes the top 20 banks globally with the exception of China Construction Banking Corp and depicts the total decline in their stock prices over the period 24^th February to 13^th March 2020.

The average bank stock has declined ~29% over the past 20 days, with the median decline at ~33% and experts fear that this is only the beginning of the colossal damage that lies ahead. The range of the stock price decline is ~57%. Liquidity issues coupled with slowdowns in credit growth and fee income are all set to manifold in the coming days and the situation ahead looks grim to say the least. Regional and country specific trends are becoming apparent as well, for instance, if we were to consider the sharp recovery of the Chinese markets and ignore their numbers, the averages share price decline climbs to ~36% and the median decline inches up to ~34%. The Japanese banks have fallen ~29%, American banks ~28% and worst yet, European banks have fallen a staggering ~48%.

Let’s turn our attention towards banking technology companies and fintechs. While the former is expected to be hit severely, the latter could emerge as a dark horse. FinTechs that provide innovative offerings using digital solutions could potentially emerge as winners. The same can’t be said about banking technology providers running multi-billion dollar technology transformation projects across the globe. Let’s dissect some of their biggest challenges:

1. The current business scenario poses a significant risk to current projects in terms of time and cost overruns, project delivery and profitability and in some cases could escalate to project standstills and closures. Banking technology companies globally are plunging into Business Continuity Planning (BCP) mode.
2. If substantial risk to current projects wasn’t bad enough, a substantial and adverse impact on revenues going forward is expected as a result of delayed proposal approvals and pipeline conversions, which could topple firms into cost cutting mode
3. Team members stranded across the globe and COVID 19 infected teams add up to severe company-wide ramifications and people related liability. Additionally, in light of project delays and closures, unprecedented pay cuts and lay-offs will be seen

The chart below takes the top 20 banking technology companies and shows the total decline in their stock prices over the period 24^th February to 13^th March 2020.

The average banking technology stock has declined ~23% over the past 20 days, with the median decline at ~22%. The decline’s range is ~53%. Banking technology companies are yet to see the full impact of project overruns and other risks to on-going large-scale projects, which has sent leading companies into Business Continuity Planning (BCP) mode. American banking technology companies are down ~19% and Indian banking technology companies ~21%. Now, if we were to look at the impact on Europe’s leading banking technology providers, with the exception of Adyen, the average decline inches up all the way to ~32%.

At this stage, the global outlook looks forlorn with most leading investment houses predicting a US and EU recession by July 2020 and many fearing that it is already here. However, even these treacherous times present some opportunities for banks, banking technology companies and fintechs.

Banks with surplus capital, a strong balance sheet and end to end digital services stand to emerge as winners in the medium to long term. In the immediate term, banks will look at end to end digitization in a lean and fast-tracked manner to ensure that all products and services can be accessed digitally. Already 72% of UK consumers and 62% of US consumers carry out majority of their banking online and these numbers are only set to rise globally given the restrictions and lockdowns enforced globally. Banks will look at strategic branch consolidations and branch closures to save costs and resort to pay cuts and layoffs where necessary.  Challenger banks with a full gamut of digital services and digital only models could emerge as winners based on how they harness the opportunity and how quickly they can onboard new customers and up-sell, cross-sell existing customers.

Banking Technology companies with a proven track record in cloud-based delivery (SaaS solutions) and offshore services could emerge as winners among the losers. These are primarily banking technology companies that have rode the paradigm shift towards microservices based architecture from a modular architecture which facilitates the effective deployment of cloud-based solutions. Secondly, banking technology companies will be able to answer the vital question; Does remote working work? If so, it could bring down costs significantly, transform the business model and improve bottom lines for companies globally. Lastly, long term opportunities through deferred up-sell, cross-sell and collaborations exist for companies that continuously exceed client expectations and deliver projects effectively.

It’s a mixed bag for fintechs really. Funding is set to dry up significantly after a stellar 2019 wherein fintech funding climbing to ~$100 Bn.  However, fintechs with targeted product offerings such as early payrolls, chatbots and contactless payments through digital platforms will continue to standout. Cloud-based banking suppliers like Mambu, Thought Machine, nCino and Leveris can emerge as winners. Additionally, banks would be more willing to work with agile fintechs now more than ever before as they look at targeted solutions from fintechs in the leanest, quickest and most cost-effective for their short-term fixes and transformations.

One thing is for sure, a daunting 2020 beholds with many challenges and some opportunities!

Written By,
Sooraj Mehta
Cedar Management Consulting International

By Ashok Kadsur, Founder, SignDesk

Banks and NBFCs in India are experiencing a sudden downturn in business due to the ongoing COVID-19 epidemic, with over 80% of companies reporting a decreased cash flow and the lowest reported economic growth rate in six years, according to FICCI.

Why are financial organizations feeling the pinch?

Banks and NBFCs rely heavily on the maintenance of a steady cash cycle to keep their business afloat, and loans are a crucial part of this cycle.  Loan processes are now facing considerable disruptions in India. There are two reasons:

First, both individuals and organizations have not been taking loans due to the health risks involved in the physical nature of the onboarding and loan disbursement process.

Second, businesses are trying to stay put and weather the storm by reducing their financial activities, such as taking loans.

Addressing these two reasons will go a long way in returning the activities of banks and NBFCs to normalcy post the COVID-19 pandemic. But how are they being treated?

How digitized loans are helping fix the problems?

Digitizing the loan disbursement process is a quick and easy solution to this two-pronged problem, as it reduces the health risks of obtaining loans to zero. It is because no physical contact with other individuals is involved in the digitized loan process.

Additionally, the low cost of onboarding and the reduced turnaround time of digitized loans lowers the financial burden of loan disbursement on banks and NBFCs, allowing them to offer mortgages at lower rates to businesses that are reluctant to obtain loans due to the financial implications.

Therefore, by adopting end-to-end digitizing of the loan disbursement process, banks and NBFCs are beginning to get their businesses back on track while ensuring profitability.

End-to-end loan digitization 

Start-ups are already offering end-to-end loan digitization solutions to banks and NBFCs. Chief among these start-ups is SignDesk, which provides a catalog of digital onboarding and documentation solutions to digitize loans.

SignDesk’s Video KYC product, scan.it, is used to digitally onboard customers. Following this, a loan agreement is ratified digitally through the online payment of stamp duty, via stamp.it. The loan agreement is then signed digitally and executed using ink.it, an e-signature workflow solution. Finally, payments on the loan are automated with link.it, an eMandate workflow solution.

In this way, the entire process can be completely digitized, thus reducing the risks of obtaining loans and injecting some much-needed stimulus into the financial ecosystem.

(Disclaimer: The views and opinions expressed in this article on Coronavirus (COVID19) are those of the author and do not necessarily reflect the views of  IBS Intelligence.)

CEO letter from Klaus Holse at SimCorp

In the next decade, asset management M&A will be an important trigger in containing cost growth, but this alone will not create scale and efficiency. Clear operating models and integrated systems are critical to supporting success.

Key to providing this, are vendors who can take up the role of trusted partners, to expand their services and open up platforms, for long-term scale and AUM growth.

With a spell of new M&A deals already at play, it is safe to predict that in 2020 we will see the consolidation of the institutional investment industry continue at pace, in order to stem outflows and stay relevant in the long-term. In February alone, we saw the buyout of Merian Global Investors by rival firm Jupiter Asset Management and US fund giant Franklin Templeton acquire Legg Mason. Meanwhile, Morgan Stanley bolstered its wealth management business by purchasing E*TRADE.

M&A is no silver bullet
While global AUM growth, largely fuelled by Asia, may paint a positive picture, global asset management cost growth continues to exceed organic revenue growth, according to recent findings from Mckinsey & Company. Meaning on the other side, is a tale of falling profit margins, where fee compression and unsustainable operational leverage are joined by a growing assault of market pressures.

Beyond short-term AUM growth, M&A needs to take a good look under the hood, to first rationalize the high operating leverage impacting profit margins. Today, AUM growth no longer guarantees as much revenue as it once did. In fact, according to Bain & Co, it now takes more AUM to generate the same amount of revenue as it did 10 years ago, squeezing the spread from 15bps in 2007, down to an estimated 8bps by 2021. In this tough climate, the key to protecting margins will be tighter control over costs. Investment operations in particular are increasingly contributing to the overall cost base of an asset manager, with costs in North America growing twice as fast as Western Europe.

While M&A can be considered a good starting point in bolstering a firm’s defenses from these market pressures, on its own it cannot create the scale and efficiency needed for long-term success. To build true scale and address the market challenges standing in the way of future prosperity, will require a fundamental shift. Moving away from the traditional operational status quo, of costly legacy systems, fragmented point solutions and outsourcing, to a clear operating model that can streamline a firm’s architecture, and form an integrated backbone across operations. Ownership of data will be a core element to this, strengthening cost efficiency, scalability and delivering significant value to a firm, in a way that outsourcing simply cannot provide.

Delivering everything as a service
The bottom line is that asset managers will need to deliver more value at less cost. To achieve this effectively, we will inevitably see a significant shift in the way vendor services are consumed, and while many in the industry play catch up to a front-to-back way of service delivery for their clients, the goalposts are already moving. If we, as vendors, are to fully meet the needs of asset managers, both today and in the future, it will no longer be enough to simply provide a front-to-back platform in isolation.

While in the past, firms acted as fortified islands when it came to their operations, the future will necessitate open platforms supported by managed services and not tools and technologies alone, to truly aid M&A efforts and solve both industry and firm-wide challenges. Here, vendors in the industry have a significant role to play, demonstrating how greater value can be achieved, by delivering beyond their traditional remit. By forming trusted partnerships, vendors will need to manage a wider footprint of investment management operations, delivering everything as a service. Empowered by the cloud, vendors will need to take over the time-consuming maintenance of the systems, processes, and data owned by the asset manager, while also being more accountable for tangible business outcomes.

With the changing needs of institutional investors, the onus will be on vendors to provide a holistic, full-service approach, with proven faster time to value and reduced operational burden, risk and cost. This will not only require a higher degree of support but also responsibility from vendors if they are to increase efficiency and demonstrate additional value and expertise across the investment chain successfully.

Take, for example, data management, which continues to create significant cost and a drain on already burdened operations teams. Vendors can support firms in capitalizing on the mountains of data they hold, by utilizing an open platform, augmented by a host of managed services. The combination of which can rationalize the incredible volumes of market data that presently floods the front office. At the same time, it can liberate firms from arduous and costly data-driven reconciliation. Ultimately, this delivers one source of truth for all processes, enabling clients to move vital resources and manpower away from firefighting data and instead onto alpha-generating tasks.

The battle of ecosystems
As well as managed services that enable firms to focus on the core of their business, vendors will also need to facilitate the flexibility firms need, to differentiate from the competition and gain an edge. The creation of an open ecosystem is the way in which we believe vendors can deliver this flexibility, along with true optionality – choice without obligation. Doing so will provide long-term scalability and positive change, not just to the industry’s financial prosperity, but also its social and environmental contribution.

If the introduction of managed services extends the reach and responsibility vendors will have inside a firm’s investment operations, then an open ecosystem is the means to connecting firms outside, to leverage innovation in the broader fintech space. This is fundamentally where we see the next race, beyond that of front-to-back platforms; The battle of ecosystems.

Put simply, open systems are increasingly overtaking those that are closed. Across both consumer and business domains, traditional business models are being put to the test. The creation of a highly networked industry ecosystem, one that enables real innovation, integration and co-creation, will in our view create greater flexibility and drive competitiveness, optimizing both sides of the coin; AUM growth and cost control.

We are already seeing this change towards openness, with the number of cross-vendor/custodian partnerships in the industry, including our own recent integration partnership with BNY Mellon. Today, SimCorp has over 50 partnerships within the industry, but we can easily predict this growing to a network of hundreds of partners, offering services, solutions and applications that are complementary to our core platform and managed services.

While these partnerships form a new co-dependency between service providers to offer something much bigger than themselves, it is ultimately the institutional investment industry that will be its biggest beneficiary. It is here, vendors can unlock further value for clients, taking away the research, development and integration work they would otherwise need to take on themselves, by delivering emerging technologies such as machine learning, in collaborations with a host of FinTechs and start-ups. An example is SimCorp’s recent announcement with New York start-up Alkymi[4], where we aim to solve the industry headache over processing unstructured data in alternative investments. It is here, we feel we can maximize the power and scale of FinTechs, RegTech, cloud and data providers around the world, and even clients themselves, to offer proprietary, third-party and co-created outcomes, via our platform.

2020 will see the institutional investment industry undergo a dynamic transition, as it continues to address the operational baggage that has shadowed its potential for so long. M&A provides a substantial opportunity in overcoming current heightened conditions, as well as reducing spiralling costs. However, it will be the role of trusted partnerships with vendors who can take on more operational responsibility and offer enhanced services, that will be vital in driving the freedom to focus on success. In the battle for ecosystems, the successful partners will be those vendors who can open up their platforms and architectures, to deliver a thriving ecosystem and abundant opportunities for long-term, sustainable growth.

Here, SimCorp is optimally placed, being neither asset manager nor custodian and with only the ambition to drive value and the outcomes that support our clients’ success.

Klaus Holse
CEO of SimCorp

By Bhavin Turakhia,Founder and CEO of Zeta

Are legacy banks operating on borrowed time?

At first glance, it may seem like banks and technology are in a warm relationship. In reality, there’s a great distance between both sides — so great, that both parties are missing out on what the other has to offer during these difficult times.

Banks are yet to optimize the full potential of technology. This pressure builds on as the tech industry is independently coming on board the financial services wagon with new-age fintech offerings even as the entire system has been disrupted due to the novel Covid19 pandemic. But, the good news for traditional or legacy banks — as they are known — is that they still lead the charge when it comes to owning the suite of exclusive banking services and products like accounts, cards, and regulatory features. It is something that FinTechs are still procuring.

But, the race has just begun. In the wake of these changes, how can banks revive their entire ecosystem without changing their core?

Moving with the Covid19 times:

Technology advancements, combined with consumers’ demand for digital banking experiences, are what’s pushing the banks towards a digitized future. According to global reports, it is inevitable for banks to modernize its processes to stay relevant and profitable rapidly. It could include SaaS or cloud-based services to boost the banks’ existing core technology.

While all this is lurking behind the balance sheets of banks, traditional banks are still bound by their legacy core systems. With few exceptions, most of the leading banks in India run their core banking operations on older platforms and several of their products on antiquated software. And, most of these cannot cope with the ever-evolving needs and demands of digital-native customers.

Often homegrown, these platforms lack the agility to adapt and can’t be quickly modernized as per the market needs. Banks can take on these changes by being proactive. It starts by creating products that meet the customized needs of the customers.

Rise of digital finance:

In this banking game of thrones, banks are no longer competing with each other, but with everyone offering financial services. Digital experience has set a new benchmark for banking products and services. It stems from the growing digital-native customers, who are critical of new products that are led by speed, transparency, convenience, and security.

All this builds up to modern banking experiences, where understanding the customer is critical. Thus, leading to trust and customer retention.

The critical equation that banks need to solve is how can they revamp their complex legacy systems and make way for modern experiences without leaving what’s core to them.

Encompassing the digital core:

A bank cannot go completely digital without the renewal of its core systems as it requires advanced banking intelligence that’ll help in altering their strategy, to cope up post Covid19 crisis: Things they need to keep in mind:

• Own their customer experience: Designing the right experience to meet current customer expectations is critical for success in today’s open banking era. For instance, when a customer approaches a bank for a savings account, he/she is already in the know-how of what they want. To further enhance this ask, banks could proactively offer banking experiences for the whole family and not just the individual. It could include looking at offering add-on experiences in the value chain like a spending tab for children, setting monthly expenses tab, and so on. It can be done by understanding the full scope of customers’ needs, making the whole experience inclusive and complete.

• Enhance their core competencies: Building a digital core also requires banks to ease their employees’ tasks, so that they can focus more on the consumer. It means assisting employees in breaking down the context behind banking transactions, simplifying control centers, and more. It will help employees get a complete overview of what customers need and the ability to deploy solutions faster. Thus, focus on the end-to-end customer retention cycle.

• Offer integrated services: With a robust digital core, banks can provide integrated services to both its internal and external base. Thus, helping them to own the complete banking ecosystem; while making way for new business opportunities. A digital core has the potential to help banks mould their offering with simplicity and speed. It includes managing regulation changes, operational enhancements, and more.

The best way forward would be to adopt a low risk, transformation model that keeps banks through the core functionalities, while offering modern banking experiences. The critical thing to watch out for during this change is scale, personalization, and time for delivery.

It is no secret that banking and finance are leading a frenzy of change. What was once dominated as services from banks and other traditional financial institutions, is now coming back to bite the whole finance sector. The winner in this game will be those who can shake this inertia at the earliest.

(Disclaimer: The views and opinions expressed in this article on COVID19 are those of the author and do not necessarily reflect the views of  IBS Intelligence.)

By Krzysztof Pulkiewicz
CEO and Co-Founder of banqUP, a Polish-Belgian API aggregator connected to 78 banks in 10 European countries.

On 14 September 2019, PSD2 went into full effect all over Europe. It made possible for a third party to connect to banking APIs to obtain the history of clients’ accounts, make a payment or check the availability of funds. In theory, it would cause a new generation of banking apps that will bring new quality to banking clients. However, the development of new solutions is not as fast as many would like to.

The UK, with its Open Banking Directive that came into force in January 2018, is far more evolved than the rest of Europe. Therefore many Open Banking solutions (like Revolut’s account aggregation) are only available in the UK.

Even the most innovative banking players, like KBC or ING, are locally connected with 4-5 different banking partners at most.

Why is it hard to get into Open Banking as a new player? banqUP – a platform that aims to create ‘one API to connect all banking APIs’, similarly to what Plaid is doing for the US Market, and already connected to over 50 banks from 8 countries in their aggregator platform, has some interesting views on this subject.

Lukasz Chmielewski, banqUP’s CTO, says that the APIs provided by banks are pretty different across different API standards, but not only – “each bank has a different approach to how it complies with PSD2 directive. There are a number of pain-points that we observed across very different national and multinational API standards and their implementations in Europe”.

Too little sand in the sandboxes
Very often sandbox/test APIs provided by banks significantly differ from the final API.

“We have encountered sandboxes that, by design, offer around 10 per cent of the functionalities of the production API. When asked – the bank’s response was ‘it’s to make it easier for third-party providers (TPPs)’. Not sure in which way,” Chmielewski says.

Why is this a problem? Sandbox should be a tool for a TPP company to test their solution to later seamlessly connect to access real data. It should also allow any entity without a TPP license to build its solution.

“Before we got our TPP license in December we basically had no idea how accurate our connector is. Only after deployment to our TPP client, we have learnt about the scale of differences. And most third-party service providers are still in this inconvenient situation,” the banqUP’s CTO notes.

Sandbox stability may also be an issue. It seems logical that the sandbox environment may be less stable than the production one, but the banks are obliged to inform their partners about any changes to a production API that may cause failure to connected applications (usually a few months prior to their release) but not to the sandbox. However, some basic level of reliability is required to make sandbox useful.

Piotr Szyperski, banqUP’s Lead Developer, explains: “When it comes to sandbox change reports, we have had cases where the changes have been communicated to us 20 minutes before their release to the sandbox Automatic tests depending on sandbox APIs almost never work for a full set of banks. We had to design the process to automatically disable/enable sandbox tests based on health checks, as instabilities occur very often.”

Non-standard standards
Another issue TPPs face is the differences within a single API standard. Mostly stemming from different approaches to the guidelines. There are banks that only support most basic scenarios, ignoring the fact that according to their API standard they should support much more. For example, some of them allow only standard payment and neither recurring payment nor scheduled ones are supported. These seem minor issues but often whole business cases can be (or are being) built around those missing features.

“Some banks follow standard to the letter, some decide to add additional functionalities or features. Others decide to ignore some elements of the standard, claiming that they are not useful,” Szyperski says.

“Standards are usually treated by banks as guidelines or inspiration only. Even if they are strictly followed, they still leave a lot of room for interpretation. Multiple optional fields, a lot of alternative paths and missing elements that most REST APIs possess – all these make the banking APIs far from perfect,” he adds.

“However, there are standards with more precise requirements. One good example is the Polish API. It is precise enough to result in very similar implementations of both AIS and PIS services across the whole country.”

Growing pains
Chmielewski says: “From our perspective it seems that both people responsible for PSD2 standards and those implementing them have been focused either on maximizing the security of the API or minimizing the effort of implementation, having internal banking architecture in mind.”

“Moreover, it seems that in some cases, after the bank has addressed the minimum regulatory requirements regarding PSD2, they invest much less of their resources and focus on improving the quality of API, especially sandbox. It may be somehow understandable, but still may slow down changes related to Open Banking.”

On the bright side, most banks approach support very seriously. They have appointed contact persons to handle API reports or even set up small departments. There are only rare cases where the answers are not helpful or take longer than one day on average.

“Many of the issues we have described stem from the fact that we are often one of the first entities that connect to a given banking API. We are observing a steady increase in stability and usability of the APIs, even though it is not necessarily rapid,” Chmielewski says.

“Reactions from banks to our feedback are also usually very constructive and positive. We believe Open Banking, with a proper set of tools simplifying connectivity, might soon become a game-changer it was hoped to be,” the banqUP’s CTO concludes.