Banks across the globe operate on a closed system architecture where transactions and software are closed to each bank. Each bank operates its systems, often making it difficult for interoperability among the banks. There is no common platform based upon which banks can share customer data and other relevant information like credit ratings. As such, it often leads to loss of financial records when a customer moves from one country to the other or from one bank to the other. The second issue is that the current banking infrastructure does not support cross-border interoperability. Meaning, migrant workers who move from country A to country B lose their financial history and ratings. This makes them unable to use past financial records to access financial services in a new country. This is a major contributor to financial exclusion for migrant workers.
One way to overcome this barrier is through open banking protocols. With open banking, there is an agreed protocol for data storage and sharing. An open banking concept is being mooted by banks in India and Nigeria, for instance. Building open banking protocols can be done in various ways. First, the banks can form a consortium to develop a platform that is open for adoption by all other banks. This will mostly come in the form of. The other option is to leverage blockchain technology in accomplishing this task. By adopting permissionless blockchain solutions, the various banks and other third-party entities will have a secure, fast, reliable and transparent protocol for both internal and external communication. It removes the burden of developing and managing expensive API as a common protocol for communication. With blockchain, the architecture, data structures and communication protocols are standardised and also, platform-independent. Customer migration from one bank to the other is easy while promoting credible ways to detect fraudulent customers. So, the banks themselves benefit from it by lowering the cost of enterprise software development. The banks can then focus on other innovations that will benefit their customers.
Over the past 5 years, banks and other organisations have been reluctant to adopt permissionless blockchain as a standard medium of development. They are faced with the conundrum of building decentralised financial infrastructure without contravening the many financial regulations and compliance regime. The Algorand blockchain network is well-suited for building decentralised financial infrastructure because it supports the creation of standard assets, execute atomic asset transfers across banks and the ability to offer a superior smart contract layer for running escrows, loan management and payments among others. Yet, Algorand’s permissionless architecture may still not be suited to most financial institutions to adopt it. Banks are careful about who they share data with, and how it is shared. Privacy concerns and protecting customer transaction data still dominate their operations.
Fortunately, and one of the reasons I love Algorand, the team has thought through this and have developed a permissioned blockchain architecture which will make it ideal for financial institutions to adopt a common and open banking protocol. The release of the Algorand co-chain blockchain architecture offers a compromise for banks to adopt a permissioned common blockchain protocol without losing the benefits of the permissionless Algorand network. According to Silvio who is the founder of Algorand, a co-chain
- “ Is totally independent from the public chain, shields its transactions from all outsiders, chooses its validators, and runs its Algorand consensus algorithm;
- Interoperates with the Algorand main chain to transact with other co-chains, and everyone else, with the same ease and security with which the members of Algorand’s permissionless chain transact with each other; and
- Enjoys, both in its internal and external interactions, the same atomic transactions, layer-1 smart contracts, and all other primitives and tools offered by the permissionless Algorand protocol. In fact, it automatically inherits all the improvements and upgrades that will be added to Algorand’s permissionless protocol.”
Conspicuously, the Algorand co-chain architecture is the panacea to building a truly decentralised open banking protocol towards solving financial exclusion which is pervasive in developing countries. Building and maintaining a private banking protocol is usually expensive to build and maintain in the long-run. That is why blockchain offers a cost-effective route to achieving this. Currently, the long-held fear of financial institutions concerning the adoption of blockchain for both internal and external communication has been adequately addressed with the launch of the Algorand co-chain architecture.
Besides the benefits of open banking to the banks, it also opens up the banking system to third-party developers who can build apps that will apply to all banks on the open banking API. If the banks run on open banking APIs, more innovations will be developed for the ecosystem and give financial freedom to their customers. Open RESTful APIs built by the third-party firms from the community for the banking sector, hopefully, will become the norm in future.
Adopting open banking does not imply that banks need to compromise on their security. They can still customize their architecture and build add-on security on top of it using the Algorand co-chain architecture. The current closed banking systems have stifled innovations and caused many people to be disadvantaged in access to cross-border financial services. Also, the cost of banking is still high due to expensive proprietary ERPs that banks run. Adopting an Algorand blockchain-based open banking systems may lower the cost barrier and allow the banks to focus on their core activities of financial management. As it stands, most banks have to maintain costly IT departments or buy expensive IT services.
This is particularly important for developing countries where the cost of banking can deter the everyday person from going digital. It is a long shot away but it will happen soon if we all join in showing the way. Blockchain could be a way for banks to go and various blockchain projects are emerging to help solve this. Open and decentralised banking APIs will be the future