As far as revolutions in financial institutions go, “Open Banking” might be one of the slowest to gain ground. In fact, a survey conducted by Which? in 2017 states that 92% of customers didn’t even know what it was back then. However, that has all changed in the past two years.
First, new rules on open banking came into force in January 2018 and made data sharing more secure, and thus, more compelling for financial institutions and customers. However, it gained its biggest momentum in January this year when the pandemic spread worldwide and made FinTech more appealing for, again, both financial institutions and customers.
As Business Insider reports,open banking use in the UK alone has doubled with an increase of a million users in the first half of this year. And the offerings and benefits that come with it promise a greater and worldwide increase in open banking users.
But, what is open banking, how does it serve both banks and their customers, and why should traditional banks and other financial institutions adopt it? Read our article to learn more.
What Is Open Banking?
Open banking, also known as PSD2 (Second Payment Services Directive), is an initiative that allows banks to securely share customers’ financial data with third parties (such as apps, FinTech companies, etc.) and other banks upon customer consent through open APIs (application programming interfaces).
In other words, banks are able to share their customers’ financial information such as spending habits, regular payments, and products and services they use (banking, credit card, etc.) with authorized third parties and banks among customers’ explicit permission.
How Can Customers Benefit From Open Banking?
Open banking provides advantages for both B2C and B2B (small medium-sized enterprises) customers. Here are some of the most important ones:
1. Better Management
With the complexity of everyday life and various banking operations and accounts to deal with, a simple and convenient way to manage multiple accounts and compare or switch between financial products can be very useful.
For instance, customers can easily track their spending habits through various apps. They can monitor how much they have left for the month once regular payments such as rent, bills, etc. are taken into account.
They can run spend analysis and categorize transactions or create lists of them, keeping track of specific spendings such as household bills or gift shopping. They can also easily keep track of their saving accounts which they can better manage with presented comparisons of interest rates.
Customers can also easily set financial goals and monitor their progress. Additional AI support or chatbots can also help at reaching their goals or encourage them to discover new ways to gain savings.
2. Streamlined Lending Processes
Open banking can facilitate the process of applying for a loan. It will not only automate gathering necessary information from different sources and submitting them to institutions, but it will also display the offers from many different sources enabling the customer to choose the best.
The same goes for SME lending. SMEs have to submit various information in order to be able to apply for a loan or draw on a line of credit, and lenders may want to review your books. Again, instead of submitting reports that waste both sides’ time, labor, and money, lenders can pull all the data they need from presented bank and accounting systems.
3. Accounting Made Easy
Accounting can be time-consuming for both businesses and individuals. However, both can benefit from easier and less expensive accounting processes with integrated systems that can automatically update per sent or received payments, which will reduce the need for manual tax-preparation tasks.
How Can Financial Institutions Benefit From Open Banking?
Especially prior to COVID-19’s devastating effects, banks are warming up to open banking initiatives more and more each day. According to Business Insider, 73% of UK financial institutions indicate that they have a positive attitude toward the open banking movement in 2020, whilst the number was 48% in 2019.
Apart from keeping up with the increasing competition, here are some additional benefits of open banking for banks and other financial institutions:
1. Improved Digital Agility
One of the most challenging points of open banking is sharing data securely, quickly, and efficiently. To achieve it, many banks need to redesign their data architectures, which often means employing an API-based microservices approach to facilitate secure access to data.
Through this redesign, as security and transparency are provided for open banking, banks can also leverage their own data internally to improve many services, products, etc. Therefore, customer experience can be improved resulting in an increased customer lifetime value.
2. Increased Customer Satisfaction
Speaking about customer satisfaction, open banking gives customers freedom and a large scale of financial services to choose from. At first, it may seem like a disadvantage for banks to share customer data instead of keeping them to themselves. However, being able to offer customers multiple financial services integrations regardless of who owns them ultimately improves their banking experience.
In the long run, as customers are less likely to seek alternatives, the customer lifetime value, hence profitability, increases.
Needless to say, banks, especially in the UK, are implementing open banking practices because of compliance. Similar to the European Union’s PSD2, countries like Hong Kong and Australia have their own regulations to be compliant with.
Adopting open banking will not only save banks from compliance fees and fines, but it will also help them stay in business.
As mentioned above, open banking is about giving third parties access to customer data. Financial institutions can turn this into an opportunity by implementing additional functionality, dedicated support, or even develop collaboration with these third parties. In exchange, these third parties can offer various non-monetary offerings to their mutual customers and cross-branding.
In short, as banks are able to create unique value propositions and employ creative marketing strategies, they also get to win new customers.
5. Expanded Clientele
Open banking can work both ways. As banks and other financial institutions share their customer data, they can also gain access to user data from other participating parties which are also financial institutions and banks. Thus, they can create their own integration-based financial products and services and offer them to other customers of other banks, which can lead to a significant increase in revenue.
Each day, the requirements of the finance industry and customers are evolving, and open banking is one of them. Therefore, adopting new trends and practices, in this case, open banking initiatives, is crucial to be able to maintain your business in the future while increasing your customer base and revenue. And doing so requires a strong infrastructure.
At Foreks Digital Solutions, we offer 30 years of financial software development experience that will help you build the most agile, flexible and strong infrastructure to help you always stay ahead of the game. We also share the best practices, newest trends, and rising FinTechs in the industry which you can always follow on our blog.