What is open banking?
Banking continues to function traditionally despite facing disruptive threats successfully. Some occasional bright ideas like contactless payments or mobile apps bring about innovative practices, and banks and customers adapt well to banking through new channels. Customer data with Banks are a goldmine that could benefit both the banks and the customer, but it stays with each bank in silos. Open banking is a program that aims to open banking data that can transform how we move and use data.
Open banking is a step forward in digital transformation for banks. It is a shift from a closed data model to one in which data gets shared between different banking ecosystem entities with customer authorization. The exchange of customer data will increase competitiveness and enable the creation of new products and services that will benefit customers and banks. The open banking rules allow sharing banking information with third parties through secure APIs.
The global open banking market size accounted for $7,295 million in 2018, and is expected to reach $43,152 million by 2026, registering a CAGR of 24.4% from 2019 to 2026.Besides that, open banking is going global, with 87% of countries having open APIs.
APIs – The Magic Wand in Open banking
Traditional banks understand that to better compete in the industry, they must develop their digital capabilities to avoid being disintermediated by new entrants with superior offerings and services.
Let us look at the distinct types of APIs. Open banking brings about three significant kinds of APIs.
- Internal APIs: Here, the APIs are exclusive to each bank or financial institution, and banks can choose how they wish to use their data and services. For example, an API connects to internal identity and access management (IAM) systems or an internal analytics platform.
- Partner APIs: Banks or FIs may have dedicated APIs to connect to a partner platform for seamless integration and real-time access to information, thereby delivering improved security, increased speed, reduced partner costs, and more.
- Public APIs: These APIs are publicly available to developers and support open banking. Financial institutions can agree with third-party organizations to expose APIs to access relevant data through a secure token.
Advantages of Open Banking
Speed to Market:
Financial Institutions will be able to spot many new market opportunities and respond faster, gaining time to market advantages. Information availability can create, and market bundled offerings that are difficult for independent providers to match.
Innovation:
Third-party providers can develop innovative financial solutions by collaborating with banking and financial institutions. With Open APIs, data availability increases across the banking ecosystem. Allowing a free flow of data will lead to the growth of third-party solutions in various sub-sectors such as lending, wealth management, personal finance management, and Robo-advisory, besides core banking products.
Risk Management:
Open banking can significantly improve risk management, compliance, and regulatory reporting. The cost of AML compliance across U.S. financial services firms equaled $25.3 billion per year in 2018. Open banking can reduce compliance costs by streamlining the onboarding process by leveraging customer data to mitigate risks.
Financial Inclusion
Open Banking has been established as a powerful tool to improve financial inclusion, based on its underlying principle of secure, customer consented data sharing.
Market Growth:
Many banks are facing slow growth in their traditional businesses and have been looking to identify and develop new revenue streams. Open banking APIs expand possibilities for growth, either by providing standard services to new customers or by creating and distributing new product offerings. Open Banking will accelerate the ecosystem growth even further.
How Open Banking Impacts the Customer Experience
Enhanced personalization
Open banking has tremendous potential to offer personalized product and service options due to the accessibility of multiple data sources, enabling tailored experiences per specific needs and customer financial activity patterns.
Consumers could access different financial services across providers from a single platform. They can get better offers with greater transparency and view their current financial situation from a single application on any device.
Besides that, banks also have an opportunity to extend and enhance their traditional services and offerings by personalizing them for a set of customers. For example, plug-and-play applications can provide customers access to see their credit score in real-time through their bank account.
Security and transparency
With the implementation of open banking, customers are in control of their data. They can give consent to share their financial data to receive financial offers. For example, customers can provide one-off data sharing access to their income and spending history for 12 months for evaluating or processing loans. Open banking will drive security and transparency with people's distrust of online data sharing and privacy concerns.
Banks and financial institutions will use security tokens to exchange data with third parties eliminating the need for a username/password, thereby reducing security risks and data vulnerability issues.
Blended financial products
Open banking enables banks to provide clubbed financial products from cross-financial organization collaborations that add more value to the customer. Customers will have more attractive financial product options at their disposal.
Improved product & pricing options
Customers receive limited financial products and services from their banks today. Open banking allows customers to get a range of offerings in different price ranges.
Better decision-making
Customers can choose the best financial products suited for them from various choices and make a data-driven informed decision. Consumers can get further opportunities to better manage their finances through innovative products that provide visibility, control, and timely financial advice on optimizing the use of their finances.
Improved Engagement
Open banking APIs can enable banks to increase customer engagement and securely meet the challenges of changing demands of existing and prospective customers. Banks can use innovative and latest technologies, from open banking to moving beyond traditional banking, to retain existing customers and convert prospective customers looking for alternatives.
Integration and connectivity encourage customers to engage with their financial data in innovative ways that add more value to the relationship - a credit score or any other service.
How Open Banking Helps with Creating Business-Centric Services.
Open banking has a high potential for encouraging innovation backed by technology and new business models. Standardized APIs help banks use customer data after their consent. Besides the customer-centric offerings, open banking helps create innovative business models.
The API Economy
Open Banking works on secure open APIs rather than the current screen scraping methods used to access client data in financial institutions. In web scraping, clients need to share credentials and passwords, which is not an optimal and secure way.
Enhancing Business centricity - Moving from a business to a platform
Using APIs, banks can transform themselves from a business to a platform. The advantage of platforms is the ability to multiply value creation by enabling business ecosystems within and outside the enterprise. The API economy will help to facilitate the exchange of goods and services by matching them to the right customers so that all can capture value.
The API economy can have a dual-working model.
a) Businesses can expose selected services and data through APIs to help partners use the data and build new service offerings.
b) Businesses can use APIs to access third-party services and data and empower themselves to develop new offerings in their bouquet of services.
The API economy is disruptive, and those who do not adapt to newer business models powered by Open banking may lose any competitive advantages and get left behind.
Other Business-Centric Models
When talking of business-centric models, the financial ecosystem has two areas distinct from Open Banking, Banking-as-a-Platform and Banking-as-a-Service.
Banking as a platform: The banks combine their traditional products and services with digital ones. Many offerings result from partnerships with third parties to offer new products and services using their channels. Banking as a platform helps banks to provide new services to their existing customer base or explore new markets through partnerships with other partners in the Open Banking ecosystem.
Banking as a service - APIs play a critical role in distributing financial products and services through third-party or partner channels. Banks can expand their marketing reach using distribution through APIs and access new markets and target audiences.
Banks with mature and efficient product generation capabilities and backend support capabilities can leverage this model to serve popular products in payment, credit product, and transaction industries.
How to Prepare for Open Banking Success
The global open banking market is expected to grow from $15.13 billion in 2021 to $19.14 billion in 2022 at a compound annual growth rate (CAGR) of 26.5%. The market is expected to grow to $48.13 billion in 2026 at a CAGR of 25.9%. North America was the largest region in the open banking market in 2021. The Asia Pacific is expected to be the fastest-growing region in the forecast period, as per Globenewswire.
Despite a promising opportunity, traditional banks are slow to adopt Open Banking. Eventually, banks will have to rise to the opportunity to stay competitive and gain the advantages of Open Banking. Banks must build data management, analytics, and agile partnerships capabilities, improve security practices, and involve the customer.
Here are some ways the banks can prepare for Open Banking.
Think like a Fintech
Agile. Cloud-first. API-first:
Unlike traditional banks that have been built-up around monolithic, closed, and proprietary systems, predominantly not API or cloud-ready, and operating in batch-modes, Fintechs are data-first and extremely focussed on the consumer experience, convenience and data-based value propositions, terms not common in traditional banking.
Leverage partnerships: Banks that are used to finding all the answers internally are realizing they can offer go to market with new products and services when collaborating with ecosystem partners through APIs.
Data-centricity:
Hyper personalization is high on the agenda for next generational financial services, often based on contextual relevance, purchase patterns and intent data. Adapting to be able to thrive in the new-normal requires bank product and strategy teams to fundamentally flip traditional thinking on its head and promote new products and services to customer chosen channels as APIs.
Developing competencies in data custodianship
Banks need to ensure that the data in hand is trustworthy and of excellent quality. Collecting data, processing, and storing it securely is essential with adherence to regulatory compliances. Data is an asset that will increase over time, and banks must manage it efficiently by managing its custodianship and subsequent consent management.
Banks must invest in data management and analytics capabilities to offer products and services to early movers to open banking in specific geographies.
Data management and analytics
Banks must develop a robust framework for collecting, sorting, integrating, and maintaining data. Data store integration, categorization algorithms, and developing machine learning capabilities and data audit mechanisms are crucial to managing data efficiently. Banks should be able to generate actionable insights from data.
Being agile to leverage partnership benefits
Banks adopting open banking will need to develop and implement an accelerated partner onboarding process in days or weeks rather than months so partners can deliver value quickly.
Enhancing security
Security is a significant component of the Open banking ecosystem. Increasing cyber threats prompt banks to implement stringent authentication and authorization protocols, especially in securing and encrypting API traffic, and prepare for defending against new threats. Implementing Bot mitigation tactics will help reduce risk to applications, APIs, and backend services from malicious bot traffic.
How to Harness Open Banking Opportunities
Open banking is about making business bank data available to partners in a secure way using APIs. It can empower businesses to increase profits, save costs, and plan their finances.
Optimize current business workflow and risks
Open banking helps businesses in many ways. Companies can focus on their core strengths and seek and exploit new opportunities. Automating processes like payments enable secure and easy flows that eliminate expensive, manual, repetitive processes.
Automation of accounting spanning banking and non-banking accounts provides a unified view. Enabling access to financial information to auditors, tax authorities, and other stakeholders automatically provides information seamlessly. Businesses can obtain better loan rates backed by a business's complete financial history. Besides that, they can choose between service providers due to price comparison.
Align your offer to the market's expectations
Using machine learning algorithms on customer transaction data can reveal fascinating insights into customers' spending and investment patterns. Harnessing the data availability due to Open Banking will help improve customer experience with tailor-made services and financial advice on time.
Businesses can find cross-selling and up-selling opportunities in insights from the bank data, besides the ability to launch precisely targeted marketing campaigns. Data enrichment in open banking helps to gain competitive advantages.
Better financial planning
Businesses face challenges due to a lack of visibility and clarity over their funds and expenses that hamper their financial planning. Open Banking based tools help in identifying future probable financial challenges, forecasting financial scenarios based on performance measuring and pre-defined parameters, and help in making well-informed decisions.
How to Excel at Open Banking
Embracing Open Banking can have challenges, but you can overcome them using these four methods.
Understand the critical requirements of an open banking implementation.
Banks must understand open banking regulations like adhering to API specifications, managing data security and privacy, and customer consent for data sharing. Banks must follow applicable regulations and adopt best practices for a successful implementation.
Identify the best fit between Open APIs and legacy systems
Legacy systems with monolithic architectures remain part of most traditional banks as they slowly adapt to modern technology solutions. Recent technologies have brought flexibility to the financial sector with API management, microservices, and integration.
Banks should look at optimal strategies to repurpose existing technologies and systems to blend in with the new technology components and tools to securely deliver successful Open Banking outcomes.
Have a broader technology vision
Open banking requires new-age technologies to work and support the business. Besides maintaining data privacy and adhering to regulations, API management, integration, identity and access management (IAM), and analytics are the key drivers of Open Banking. Banks need to review technical debt and update their technology stack to respond to opportunities with agility.
Map your open banking strategy to a long-term vision
Open Banking is a journey to new opportunities, and banks must map their strategy with futuristic digital goals. Open banking is the right and quick step to digital transformation initiatives. Banks will have to analyze the depth they need to move and plan for technology and infrastructure to support the business in products and growth.
Key Challenges with Open Banking
Open banking holds tremendous potential for innovation in the financial sector. But it also has its challenges for banking institutions.
Some key challenges are:
Increased competition
Many pure digital entities are producing innovative and highly engaging financial products and services. But most leading banks have legacy systems, and modernization is slow, and they face the risk of increased customer churn, losing market share, and more pressure on profit margins.
Data security issues
Open APIs are risky when sharing financial data and are vulnerable to data breaches and security risks. A lack of industry-wide technical standards and data sharing protocols increases vulnerability risks. Banks will need higher investments into the security that can impact their bottom line. However, banks cannot ignore the potential Open banking offers either.
Commoditization risks
Open APIs eliminate many barriers to switching accounts and comparing quotes from multiple financial providers, with price being the only factor. The convenience of digital aggregators offering quick comparison can lead to customer migration and a fall in profits.
Government Mandates and Regulatory Compliance
Though in most countries, Open banking adoption is fuelled by market pressures, there are a handful of countries where governments have introduced formal Open Banking regulations, mandating banks to comply with specific sets of standards to drive innovation and introduce competition into the Financial Services sector. Such countries include the UK, EU, Australia, and Hong Kong.
Other countries have introduced informal regulatory frameworks and guidelines for Open Banking. These include the United States, Canada, Mexico, New Zealand, Nigeria, and India.
The regulations mean banks must seek technology solutions to rapidly implement Open Banking standards that can sit alongside traditional core-banking systems.
Conclusion
Open banking will speed up the digital move for banks. Banks need to bridge the legacy system's pull by leveraging the next-generation capabilities like API, microservices, and cloud, among others. API platforms with pre-built API stacks can help accelerate a bank's digital transformation initiatives. Banks and financial institutions need to improve the existing range of offerings through better partnerships and collaborations with third-party providers. Success will lie in building value propositions focusing on customer needs and hyper-personalization.
