Earlier in the Banking industry, customer data and transactions information was available only to the respective banks. With the advent of digitization, Open Banking, and the presence of IoT and machine learning, customer and their transactional information are available for viewing by multiple stakeholders in the banking ecosystem. Thanks to the new open banking initiative, Banks are mandated to share/open customer data to organized institutions, bringing in innovative products and services at a competitive price.
Open Banking has changed the long old banking operation where Banks design various products, services and associate prices and control the users’ data flow. Thereby they have control over the customers to a large extent. This way, Banks were pushing the same offer to all the bank customers, regardless of customer requirements. But beyond Banks, there are 3rd party Fin-tech’s/other vendors who might offer disruptive and revolutionary products/services, which might take customers and their servicing into a different orbit. These vendors may be very small in size and have limited offerings but can quickly disrupt the market by offering innovative and competitive products and acquiring a good market share.
So the whole idea is to benefit the customer with innovative and competitive products.
For example, the Loan Products currently available in the market have been very generic for a long time, and they don’t offer any personalization and customization. The start-ups that get customer loan data, subject to approval from the customer, might offer an altogether different and innovative loan product with a flexible repayment option. This is a good example of tapping the customer out of the Bank network.
The only way to reach the global customer has brought the concept of Open API. As per industry growth in the next five years, Open API will bring at least 20-20% profit to the banking business.
Open Banking has been in the industry for the last couple of years, but it has garnered the limelight as the significant disruption in the digital banking era in the last few years. It is helping the 3rd party vendors/fin techs, but it also creates a business case for the Banks. In simple words, Open API allows the bank to create value for its customer and the rest of the prospects with the help of other vendors.
The core requirement for establishing an Open API strategy is to have an architecture designed to accommodate integration by creating a middle layer. Open Banking is driven by technology integration. The technology will be at the centre stage to have a successful Open Banking strategy, which are:
- Have sandbox to partner with 3rd party ecosystem vendors
- Create a compliance Layer- This is of high priority as the involvement of multiple players across different geography.
- Centralized API layer
- Data Sharing of customer’s/ consent management – A customer should be able to see, choose and share consent. Customers should have access to the list of vendors’ consent shared and can choose when to withdraw.
Banks are facing multiple issues to have a strategy in place for Open API. This is persistent in the market because of reasons like lack of strategy for having an API layer and internal stakeholders do not have use cases or clarity of the roadmap. The ideal strategy for establishing an Open API ecosystem can be as mentioned below:
- Start Simple and start building new use cases and implementing the use cases to see the action and reaction in the sandbox environment. Open APIs help reduce operational efforts, so identifying the actionable area one by one will be the key. E.g., One case is ride-sharing applications use banks/cards to realize the payments.
- Be transparent- Establish trust and transparency with the vendors and customers. This will build a strong relationship within the ecosystem, which will help create innovative products and personalize the offer to the customer. The vendors will be the front face, which will help generate a new revenue stream. The sales and revenue generation will be through the vendors.
- Build strong partnerships – Look at the bigger picture and invest in long term partnerships as monetization opportunity is available for both direct and indirect servicing to the customers. Customers can be onboarded by finding a logical partner that will help onboard customers to the bank service network or vice versa. E.g., Unified Payment Interface(UPI) is a unique way to transfer money between two parties and pay bills from a bank account. These UPI services are more prevalent in third-party vendors’ networks like Google pay, Phonepe and Paytm than the bank’s platform.
- Explore new customers and reach the underserved customers with a low credit score. Bank does not have the bandwidth to reach all customers, but they can onboard the underserved category by partnering with 3rd party vendors. E.g., Third-party lending apps partner with banks to provide loans to the underserved consumer category.
Banks have adopted Open banking globally and for all fair reasons. Profinch can help you understand how your bank/client can incorporate this into their system. Please contact us for more details at: https://profinch.com/get-in-touch/contact-us/.