Understanding Open Banking: Point-to-Point vs. Aggregators.
One of the questions we’re asked most often is, “What is point-to-point connection open banking?” While it may sound technical, it simply means a direct connection between a financial institution and a third-party provider (TPP), with no intermediary. It's also a key differentiator for our technology.
As financial institutions continue to evolve in the digital age, with a strong push to attract new customers, understanding the nuances of open banking is critical. Below we’ve outlined the key differences between point-to-point and aggregators, so that financial institutions can make informed decisions about their open banking strategies.
Point-to-Point Open Banking: Direct and Secure
Direct Connection
One of the most significant advantages of point-to-point open banking is the secure, direct connection between a data recipient and a data provider. In other words, there is no single point of failure, which is a risk with aggregators (more on this later). Imagine a simple straight line connecting your financial institution directly to a FinTech partner. By reducing the number of entities touching the data, there are fewer access points for fraudsters, reducing the potential for data loss. The point-to-point setup ensures clearly defined data control and a straight-through data flow, minimizing potential security risks.
With point-to-point connections, there is clear delineation of who is responsible for the data. A financial institution also has clear visibility into who controls data at any given time and how it moves, strengthening trust and compliance.
Ease and Speed to Innovate
Point-to-point open banking excels at delivering tailored solutions. Connecting financial institutions directly with third-party providers (TPPs) enables precise data sharing for specific use cases. This is where our ecosystem manager comes into play. The ecosystem manager is the set of rules, standards, and practices designed to establish and maintain direct trust between the financial institution and the TPPs. It ensures that data is shared securely, transparently, and with the appropriate level of consent.
That means when your financial institution is looking to create a unique experience with a third party, you’re not dependent on an intermediary to build a custom API. You also don’t need specific code changes or releases—all of which would be required within a data aggregation model. With point-to-point open baking, you have full control of your product offering, and accelerated time to market for new innovations.
Did you know? Caspian’s platform can be leveraged to enable secure vendor integrations that support use cases beyond data sharing, enabling broader digital transformation strategies.
Embedded Finance & Distribution Channels
A point-to-point interface enables financial institutions to diversify their services through new channels or non-traditional markets, such as embedding financial products within third-party accounting applications for small-medium businesses (SMEs). Similarly, the direct connection is well suited for powering embedded finance use cases. A good example is a “buy now, pay later” option at the point of sale or online. These kinds of offerings are the quickest way to attract new digital native client segments.
Financial institutions can also augment their own offerings with both financial and non-financial third party solutions. By focusing on areas where they are best positioned to build a competitive offering, institutions can then supplement with third-party products. Commonwealth Bank in Australia has included travel solutions, including travel booking features, to complement their suite of travel, payment and savings-related financial products.
Predictable Cost
While the initial investment with point-to-point connection may be slightly higher, it offers predictable costs as you scale, without hidden increases. Regardless of size, financial institutions prioritize expense management, which makes cost-efficiency without any surprises a key advantage. This straightforward solution eliminates variable intermediary costs like API calls and custom service development, reducing the financial burden and making it a compelling choice.
Aggregators: Broad Access with Complexity
Aggregators' Head Start
Timewise, legacy aggregators have had a headstart over the modern ecosystems. Think of it as the wild west (aggregator) vs the modern standards focus (ecosystem manager). Aggregators have been in the financial data aggregation space for years, relying on the risky practice of screen scraping technology to gather financial information. This extended period has allowed them to establish robust connections with a wide range of third-party providers (TPPs).
Since point-to-point connections are integral to ecosystem managers that are designed for scaling data-sharing, aggregators’ assumed advantage will diminish quickly.
Did you know? Once the rules for joining an ecosystem manager are established, expect a rapid increase in the number of third-party providers participating. A prime example is Brazil where the number of participants grew to over 800 within 22 months.
Lack of Customization
The modern competitive landscape, especially in global digital markets, hinges on differentiating the customer journey. Increasingly, financial institutions are integrating dynamic business policies into their customer journeys. Ownership and direct connectivity are foundational pillars for success in this arena.
Aggregators often adopt a "black box" approach, providing standardized, off-the-shelf solutions. This commoditized offering limits flexibility and adaptability. They have traditionally focused on use cases where the financial institution is the data provider, not taking into account the tremendous value for data flowing in the opposite direction.
Financial institutions looking for tailored solutions to meet specific customer needs or strategic objectives may find aggregators restrictive in their ability to innovate and differentiate their offerings. Aggregators will be hard-pressed to keep up with the future pace and scale of the open data revolution with multiple discoverable ecosystems and APIs.
Complex Security Management
Managing a network of TPP integrations becomes increasingly complex as more providers gain access. Aggregators must manage and safeguard vast quantities of sensitive data from diverse sources, a task fraught with security challenges. Handling such large volumes of information increases the risk of cyberattacks, including fraud, unauthorized transactions, and identity theft. This makes security a paramount concern for aggregators, as a breach could have catastrophic consequences.
Variable Cost
Typically, aggregators charge on a per API-call or transaction basis. These variable fees result in exponential cost growth as you scale, penalizing you for your success with unpredictable expenses. Cost for innovations can be just as difficult to gauge, as your financial institution becomes dependent on the intermediary to build your custom integrations or premium APIs into their roadmap. During the life of the program, an increasing financial investment or overhead is required for data aggregation and management. These costs can add up, impacting your bottom line.
Our take on the role of an aggregator: Aggregators play a centralized role in mediating data flows between financial institutions and the consumer. A single point of failure can have catastrophic consequences, taking down hundreds of financial institutions and fintechs all at once. To mitigate these risks, the modern ecosystem manager is designed with redundancy and resilience in mind. A serious consideration for a future-proof roadmap.
In addition to the above, financial institutions should consider an aggregator's role in data sourcing. Currently, the aggregator role is placed front-of-house (sourcing or publishing data), and by default has access to all of the data — realistically without paying for that privilege. Financial institutions would be better served by repositioning aggregators as utility shared services, allowing data to be fed directly to them rather than having aggregators own it. In short, segregate their data roles cleanly so that you can establish the appropriate commercial structures and allow data to flow between participants without cost and without intermediaries having access.
Making the Right Choice for Your Financial Institution
Making the Right Choice for Your Financial Institution
Ultimately, evaluating your specific use cases and priorities will help you determine the best approach for your open banking needs. This is where we shine. Our fine-tuned assessment process will help you identify key business drivers and help us understand your current technology systems and infrastructure. This context will allow us to tailor an open banking ecosystem solution specifically designed for your needs.
Caspian One Open Data Platform
Caspian One's solution marks a significant departure from legacy platforms and aggregators catering to financial markets. While those platforms were constructed to meet screen-scraping demands, and then evolved to include APIs, Caspian's platform was built intentionally, from the ground up, to deliver secure data-sharing ecosystems with financial grade APIs. It enables both point-to-point connectivity and the structuring of multiple partnerships, fostering parallel innovations to deliver value-added services to your end-users.
Want to discuss your open banking needs? Let's connect.
