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Open Banking made its debut relatively a short while ago and has rapidly evolved into a mainstream function, gaining enough momentum to warrant being a key component of many financial institutions’ strategy and execution plans.
Open Banking can be defined as a collaborative model that allows sharing of financial transaction data with authorized third parties via application programming interfaces (API’s) upon customer consent.
The benefits of Open Banking are extensive and include improved experience for customers and potential new revenue streams for financial institutions delivered as a result of new and enhanced products, services, or capabilities for existing and untapped markets.
At this stage, financial institutions are primarily leveraging Open Banking in two ways:
• Developing APIs to share data with authorized aggregators and fin-techs via customer consent as opposed to allowing aggregators to broadly screen scrape. This helps protect customer data and minimizes fraud as customer credentials are no longer stored with the aggregator and data cannot be shared without customer consent. Customers also have the ability to revoke consent at any point in time.
• Developing Personal Financial Management (PFM) solutions or providing financial views that aggregate spending across multiple banks and payment platforms to provide customers with a holistic picture of their finances.
“Open Banking can help streamline the oftencumbersome process by compiling information from a customer's previous relationship in the bank to pre-fill forms or approve a customer automatically for a new product/service that they are signing up for”
In addition to these applications, there is enormous potential to serve customers in whole new ways through the creation of unique API-enabled products and services in partnership with third party providers as opposed to the product-centric approach that exists today.
By developing API-enabled service offerings based on customized and personalized use cases aimed at alleviating customer pain points, banks and financial institutions can create entirely new innovative business models driving up organic growth and leading to net new revenue streams across the organization.
This, by extension, is the concept of "Open Finance" which is built on the foundation of Open Banking
For example, given recent low mortgage rates, the marketplace is seeing a flurry of refinancing activity. Refinancing requires customers to gather and provide several months’ worth of bank statements in addition to other paperwork. By using an Open Banking model, mortgage originators at a financial institution can automatically consolidate information from across multiple customer accounts into its mortgage platform. Much of the manual extraction work can be automated through artificial intelligence (AI) to classify information and visually depict a detailed digital picture of the applicant. This can result in dramatically shortening the entire refinancing process and potentially result in enormous efficiency gains for the customer as well as the organization.
Another robust use case is account opening. Open Banking can help streamline the often cumbersome process by compiling information from a customer's previous relationship in the bank to pre-fill forms or approve a customer automatically for a new product/service that they are signing up for. Additionally, all Know-Your-Customer (KYC) and authentication processes can be validated against documents that a customer provided at the time of becoming a bank client. Once verification has been completed, customers can be approved within a few clicks of a button, ultimately eliminating the need to fill out individual applications for additional financial products.
The benefits of Open Banking extend beyond the customer experience to financial institutions collaborating with other financial institutions and third-party providers to create and share products and services to best serve their customers’ financial and non-financial needs. As an example, customers holding accounts at multiple banks would be able to pick and choose products and services from various banks to create their own custom portfolio of financial products that are most relevant to their lives.
Given the potential benefits of Open Banking, financial institutions should take the following steps to ensure they are well-positioned to maximize these opportunities moving forward:
1. Rethink Digital Transformation: Keep the customer at the center of every decision and create new and unique service propositions through API-enabled offerings augmented with artificial intelligence, data analytics and financing models
2. Educate and engage customers: Educate customers on data sharing through clear, step-by-step proactive advice delivered through timely communication to help them confidently engage with third parties. Provide insights to customers around the benefits of Open Banking and bring them along in the journey to enhance trust and retain the financial institution’s role as a trusted advisor and custodian of customer data.
3. Enhance technical and operational capabilities: Invest in robust APIs and data analytics capabilities to create Open Banking solutions with the goal of providing a superior and secure customer experience.
4. Secure customer data: By opening up access to data, it is imperative that banks also make the security of customer data paramount. In addition to instituting and tightening systemic controls, consumer concerns around privacy and sharing of sensitive data can be alleviated by placing control in the hands of the customer through opt-in offerings or by providing customers the ability to revoke consent for services as and when needed.
5. Create an ecosystem of partnerships: Financial institutions will need to determine optimal partners to help create API standards and Open Banking solutions, keeping in mind the end goal of providing customers with a superior experience.
Open Banking has the potential to pave the way for the next wave of innovation in financial services by creating unique opportunities for collaboration and connectivity through open platforms. The key is to look beyond the traditional “Open Banking” applications and into the realm of “Open Finance.”