FinTech Magazine attended State of Open Con 24 in London in February 2024, where the work that financial institutions are doing with open-source technology was a prominent topic of discussion.

In the past, banks have prioritized protecting client data and have spent a lot of money gathering this information in order to create a digital profile of a customer's financial riches.

Although this has long been the accepted norm for security at financial services companies, open-source technologies have made it unnecessary as of late.

Open-source software and technology may be utilized in a variety of ways to promote innovation, cut expenses, and increase efficiency by utilizing the blockchain's potential. Open-source technologies have a big impact on the financial services industry, from core banking systems to open data, which McKinsey defined as the capacity to exchange financial data across a digital ecosystem with little effort or modification.

While some banking organizations may have been instantly put off by the release of formerly highly guarded data sets from banks and financial service providers, forward-thinking financial institutions have recognized the benefits of utilizing open-source.

The reasons for banks' eagerness to embrace open-source
In contrast to the high fees they currently pay for acquiring data, banks should "be thrilled at the opportunity to access a non-competitive model where they can pay fair use for data," according to Lee Fulmer, the independent Chairman of the Reporting and Data Standards Transformation Board at the Bank of England.

He goes on: "There are businesses that receive data from big financial institutions, combine it with data from other organizations in the market, and then sell it back to the original source.

Therefore, this poses a risk to big banks as many of them are losing the value that comes with their data—which may be really valuable—because someone else is selling it and making no money off of it.

This is the reason I think banks should support the notion of open-source software adoption since it eliminates any rivalry in the data distribution and storage space. If everything is in the public domain, there won't be any rivalry and less money will be wasted.

Open-source software: Breaking over obstacles

Indeed, according to Chris Howard, Head of the Open Source Program Office at EPAM, banks and other financial services providers do not always utilize open-source software transparently, even when they do.

According to him, a lot of conventional financial institutions either still fear using open-source because they are keeping their trade secrets to themselves, or if they do, they use it very inwardly, merely taking advantage of the technology and not adding anything to the open source, blockchain-powered network.

Accordingly, Howard continues, "the primary focus of discussion today is cooperation, and the necessity of working together to build data transparently before the industry standardizes these practices."

The first step to fully utilizing the potential of open-source technology is realizing the necessity of collaboration, with banks working together to develop data, as not all financial institutions utilize open-source software, and maybe those that do are not transparent about their usage of it.

While there are some instances of open-source collaboration among financial institutions existing, it is debatably rare, and when it does occur, neobanks and digital players usually take the lead.

According to Howard, "we're on the precipice, I think, of increased collaboration in open-source, because change is being driven by tech-focused and transparent challengers like Monzo, Starling, and Revolut." Thus, working together on open-source technology is the first step for legacy banks.

Additionally, the CEO of Percona, Ann Schlemmer, states that educating banks about the benefits of open source collaboration is the first step in initiating such collaborations.

"Education is the biggest obstacle, especially for institutions that feel at ease with closed-source software. It has been demonstrated that the misconception that open source software is less safe is unfounded, according to Schlemmer.

"Software that is publicly available can be viewed by malicious hackers, but data access is more difficult than on a closed-source platform where the owner is the only source of updates.

"Keep in mind that there are numerous white hat hackers who can identify any security holes in the platform and provide fixes much more quickly if the software is open."

The course of the open-source cooperation

Nevertheless, all of our speakers concur that the traditional banks are beginning, or will soon begin, to take action to get through these long-standing obstacles to the adoption of open-source software.

Some of the larger financial organizations today are realizing two things, as noted by Howard. First, they must follow the lead of their digital rivals if they hope to maintain client loyalty and keep on top of trends.

This entails cooperating to create standardized workflows and exchange APIs. Banks that would never come together over a table to discuss how they model their data or the details of their fraud detection systems are now cooperating with organizations such as FINOS.

The Open Invention Network is another organization that works to dispel the secrecy around banking operations and promote a culture of cooperation in order to create something for the common benefit. It is assisting financial institutions in realizing the potential of open-source collaboration.

"We are encouraging people to recognize that where we collaborate, where we build on each other's ideas, and where the modality of open source is prevalent, is an area of freedom," says Open Invention Network CEO Keith Bergelt.

As the Open Invention Network offers a secure environment for ideas to be freely shared, users need not worry about intellectual property when they join.

According to Bergelt, the emergence of fintechs is forcing more established banks—especially Tier 1 establishments—to either create their own technologies in-house or make modifications to the ones they already use from outside technology suppliers.

"Insurance from the technology manufacturer—the hardware manufacturer that is also responsible for integrating software—is a customary practice for banks," notes Bergelt.

In order to keep up with fintechs, banks are hiring an unprecedented number of software developers, which nullifies the need for indemnity. This basically means that everything is changing today.

"Indemnification can be revoked since software engineers at banks are increasingly handling this themselves, so it no longer becomes the technology supplier that brings in the technology and modifies everything for you.

As a result, banks are altering the relationship they have with software suppliers by personalizing the software they employ, turning into more like tech businesses in this sense. and altering the indemnity nature of the partnership.

Because of this, banks are frequently unprotected against the unprecedented volume of litigation launched against them by patent assertion firms that are, for the first time, focusing explicitly on open source technology.

Banks are joining the ranks of all IoT, telecommunications, electronics, automobile, and really all software-intensive industries by banding together to take part in the collaborative Open Invention Network, the world's largest open source patent risk mitigation initiative. In this new world, banks are looking to take control of their technology futures to better serve client needs but face heightened patent litigation risk by doing so.

Technologists are already employed by banks, and cooperation amongst banking institutions would encourage a common culture of security features and best practices.

Bergelt continues, "Many of the biggest banks, especially retail banks, want to have complete control over their technology."

"They want to be able to go ahead and do it if they need an update." From a branding standpoint, they also desire their own technology.

And with the introduction of RISC-V, it is not too difficult to see a scenario where retail banks tape out their own chips to support their own gadgets and applications and guarantee that their clients receive what they want.

According to Bergelt, "this is why banks can start developing their own products and services by leveraging open-source technology."

Open-source: The regulatory perspective
Fulmer sees a chance for regulators to leverage open source as and when banks begin using open source platforms more often.

He predicts that banks will all begin utilizing open-source technologies in one form or another. It will allow them to commoditize some of their technology-driven goods and services and cut their expenses.

"There is potential for financial regulators to also use open source once this becomes completely commonplace and normalized. This is because regulators are concerned about how the economy and society are perceived."

Fulmer argues, somewhat paradoxically, that a stricter regulatory framework should be developed to set out the criteria of open source usage at banks and financial institutions in order for open source to become broadly adopted throughout economies, which is a prerequisite for its adoption by regulators.

"We ought to collaborate with the community striving to steer the open-source agenda for financial institutions in order to establish a regulatory framework," continues Fulmer.

We ought to strive to establish an open source framework in the same manner that they are attempting to define an AI framework.

"I believe that getting the community involved with some of the US, UK, and EU regulators would help to get them all on board with this."

Fulmer says, "And I think that's the thin edge of the wedge." "I believe it's a done deal for the banks once you get the community on board and the group of lawmakers to sign on."