The Power of Open Banking – Turning Foes into Friends

“You must learn to let go. Release the stress. You were never in control anyway” – Steve Maraboli

The banking industry seems to be more accepting of this universal truth now. New competitors to traditional banking in the form of Big Techs and Neo Banks are leveraging advanced technology for offering sophisticated banking solutions. One big difference between the traditional banking and these players is that the latter is more open and flexible than ever before, to customer expectations. As a result, they have shaken up legacy banking business models at its core. Traditional banking models assume the sole ownership and guardianship of the customer data, while the new ones create value with democratization. Capabilities of new age banks have skyrocketed customer expectations and led to tectonic shifts in their preferences. Financial institutions operating on conventional frameworks are picking up momentum and transforming their core processes to align to these changes. Banks that previously recognized Fintechs as their competition are now partnering with Fintechs to provide innovative multichannel and easy-to-use solutions. All of this has been possible as a resultant outcome of the most contemporary gold standard of banking, the Open Banking.

As McKinsey Panorama reported, around 80% of financial institutions have entered into a partnership with Fintechs and have embraced open banking in the form of Open APIs. These banks have observed growth in online deposits and loans. They are delivering superior customer experience without increasing their branch footfalls. Devising an open banking strategy is important for banks of all sizes to live up to the next-generation customers’ expectations and contending against new entrants.

The Rise of Open Banking

Open Banking resulted from the European Union’s revised Payment Services Directive (PSD2), released in 2016 as an update to the PSD rules of 2007. The PSD2 was enforced as national law by member states to “support innovation and competition in retail payments and enhance the security of payment transactions and the protection of consumer data.” The concept soon became a global agenda in the banking industry, and regulators in the U.K. and other countries started prescribing their Open Banking guidelines or frameworks.

For fast paced growth in banking, customers need their service providers to be agile, flexible and trustable at the same time. While traditional banking brings forth trust, the new age banks and financial institutions present an unmatchable speed and flexibility of service to the customers. And Open Banking blends these two core attributes perfectly.

What is Open Banking?

Open Banking is a structure for bringing together banks and third-party financial service providers (TPPs) to deliver relevant, personalized, connected customer experiences. The process involves banks opening up their Application Programming Interfaces (APIs) to TPPs, allowing data sharing at different levels. Shared data is utilized to create new apps and personalized services for users.

Banks and digital disruptors join forces to cosset tech-savvy consumers as they embrace self-service solutions and prefer born-on-the-web payment options. To accelerate the transitioning of traditional banks into next-generation financial services providers, industry leaders are developing an Open Banking ecosystem. This environment thrives on API-based contextual financial services offered by fintechs to support core banking functions through electronic banking, real-time payments, and secure cash management processes. Agile Open Banking strategies are formulated upon customer centricity to help banks engage customers and generate new revenue opportunities.

A Stakeholder Perspective on Open Banking

The current adoption of Open Banking isn’t all-encompassing. There is scope for secured data sharing and improvement of services by optimally utilizing resources. Open Banking Working Group (OBWG) suggests, an efficient Open Banking strategy will improve the banking experience for all involved parties’. The incentives for stakeholders would vary depending on their interest in securing benefits, cost-effectiveness, risk management, regulatory accountability, and revenue generation.

Regulators: A robust governance model assists regulators in identifying the risk and fraud challenges. Well-defined resolution mechanisms are expedient to detect threats in real-time as they maintain proper regulations and standards to enhance other stakeholders’ trust in the process.

Customers: Individuals and businesses must trust the bank and TPPs before they agree to share their data. They would expect personalized and cost-effective wealth management services in return. They prefer to compare prices and select the most resource-efficient services and financial products.

Lenders: They will be able to identify a customer’s risk appetite and forecast their ability to pay off a loan by analyzing historical data. This would enable lenders to target customers appropriately and provide them competitive offers.

Third-party auditors: Fraud detection won’t be a challenge for third-party auditors if they can securely monitor transaction data for unusual changes in behavioral and spending patterns. They can gather and compile data from multiple customer accounts, product types, and TPPs using innovative aggregation tools.

Need and long-term impact of Open Banking

Fragmentation of financial operations through Open Banking is the prelude to omni-channel banking experiences and addressing:

Evolving customer needs: Customer expectations are evolving expeditiously beyond core banking services. A holistic customer experience encapsulates additional benefits like real-time payment updates, accessibility of self-service options, one-click insurance, and loan services. Several studies demonstrate the willingness of consumers to use this technology. Barclay’s research found that 40% of consumers are willing to share their data to receive personalized financial management services. Another study by Accenture found that 85% of 18-25 year-old consumers trust third parties to aggregate their financial data. When a clear benefit was identified and conveyed, the research participants demonstrate a strong propensity to adopt Open Banking.

Implementing a ‘Digital First’ approach: A large set of customers now prefer interactive digital banking over in-branch banking. The COVID-19 crisis has furthered usage of online banking services. Around 70% of the 4000 customers surveyed by a research institute revealed they held an account with a digital-first financial service provider or banking challenger and agreed to have a better user experience.

Collaborative teams are presently a requisite for banks to drive higher customer satisfaction levels for the “digital-first” users.

In Summary

Banks are using Open Banking to offer their customers innovative banking and payment solutions. With Open Banking, Fintechs can help banks reach every corner of the market, and banks can lend them trustability. As Open Banking is still nascent across all markets, the path ahead involves outlining minimum regulatory requirements to build customer trust in banks and TPPs. Risk-scoring based on data sharing between banks will make Open Banking transactions secure and aid in dispute resolution to help the ecosystem thrive systematically.