Open Banking – Opening New Avenues in Banking (Part-1)

Bank executives are discussing Open Banking as a hugely important strategic issue due to its power potentially to both disrupt and create new opportunities. Open Banking also comes with risks, which all the stakeholders need to manage. While a sizeable work has been done on this subject in the other parts of the world, but in India, we are still catching up with the heat. In this three-part article, we cover why Open Banking matters and how the banking landscape may change going forward. In this first part, we include the meaning and opportunities of Open Banking.

WHAT IS OPEN BANKING?

Open banking is also known as "open bank data." Under open banking, banks allow access and control of customer’s personal and financial data to third-party service providers, which are typically tech startups and online financial service vendors. Customers are normally required to grant their consent to let the bank allow such access. Third-party providers application program interfaces (APIs) can then use the customer's shared data. Uses might include comparing the customer's accounts and transaction history to a range of financial service options, aggregating data across participating financial institutions and customers to create marketing profiles, or making new transactions and account changes on the customer's behalf.

MAKING THE MOST OF IT

Offering customized products 

By relying on networks instead of centralization, open banking can help financial services customers to securely share their financial data with other financial institutions. For example, open banking APIs can facilitate the process of switching from using one bank's account service to another bank's. The API can also look at consumers' transaction data to identify the best financial products and services for them, such as new savings account that would fetch more value-added services than the present savings account or a different credit card. It also empowers customers to take charge of their finances and make informed decisions to manage their accounts.

Credit solutions

Through the use of networked accounts, open banking could help lenders get a more accurate picture of a consumer's financial situation and risk level to offer more profitable loan terms. It could also help consumers get a more accurate picture of their finances before taking on debt. An open banking app for customers who want to buy a home could automatically calculate what customers can afford based on all the information in their accounts, perhaps providing a more reliable picture than mortgage lending guidelines currently provide. 

Getting or refinancing a loan may become easier. Instead of manually gathering information from a variety of sources and submitting it to a potential lender, consumers can permit lenders to just grab what they need directly and make them a better offer.

Making sound financial decisions

App developers will have an easier job with open APIs, allowing them to help customers take control of their spending. With artificial intelligence, they may be able to predict events in a customer’s account or suggest products that may save you money.

Automated accounting

Businesses and consumers may also benefit from easier and less expensive accounting processes. Integrated systems can automatically update when you send or receive payments, and you may enjoy a reduction in manual tax-preparation tasks. In India, roll out of pre-filled income tax returns is on cards, which will simplify the process of return preparation and filing. Right now, the calculations related to various investments made by the taxpayers in different types of investments like shares, bonds mutual funds, etc. make the calculations complex.

Newer methods to make the payments

Payments are a significant piece of open banking regulation. The banks might allow third-parties to initiate payments on the customer’s behalf. It will get easier for additional service providers to handle payments. Businesses may also benefit through reduced payment processing costs. With Open Banking APIs, customers won’t have to wait in long queues to make purchases using physical wallets at stores. The concept will allow emerging technology applications such as Google Pay, Samsung Pay, Apple Pay, PayTM, etc. to make payments using digital wallets using the Smartphone or smartwatch.

Ease of remittance and currency exchange

Banks have always found international money transfer and remittances to be a painful and expensive process. Instead of paying a large transfer fee to the ‘money transfer businesses’ or facing the lack of proper setup, especially in rural areas, certain FinTech companies have made this entire process extremely simple, smooth, less expensive, and much faster. Thanks to Open API, the money can be transferred, services can be bought and bills can be paid seamlessly by using one single mobile App at the comfort of the customer’s home. Various service providers such as We Swap, World Remit, mPesa, etc. are offering ‘currency exchange services’, by using Open Banking, in a very secure and seamless way to transfer even minuscule amounts of money overseas.

Managing costs

Open banking will force large, established banks to be more competitive with smaller and newer banks, ideally resulting in lower costs, better technology, and better customer service. Established banks will have to do things in new ways that they are not currently set up to handle and spend money to adopt new technology. However, banks can take advantage of this new technology to strengthen customer relationships and customer retention by better-helping customers to manage their finances instead of simply facilitating transactions.

Allows banks to be futuristic

The model allows banks to be futuristic by letting them understand both data privacy mandates that exist as well as the likely changes they need to adapt for better customer experience. Thus making decision-making foresighted and insightful.

Compliance

The main reason banks are implementing open banking practices is compliance — or at least preparation for compliance. The US Treasury, European Union, Hong Kong, and Australia require banks to share customer data with third parties. 

Improved Digital Agility

A major challenge of open banking is being able to share data securely, quickly, and efficiently. As a result, many banks have to redesign their entire data architectures, often employing an API-based microservices approach to make data more accessible. Greater digital agility, then, is both a necessity and benefit of open banking.

Improved digital agility not only brings enhanced levels of security and transparency, but it also makes it easier for banks to leverage their data internally — e.g. for service personalization or to create frontend applications — where it may have been impractical, or even impossible, to do so previously.

Wider client base

Until now, we’ve focused on the benefits of sharing data with others. However, it’s important to recognize that open banking is a two-way street: in other words, it could allow banks to gain access to user data from other participating financial institutions (especially other banks). This creates a massive opportunity for banks to create their integration-based financial products and services.

Bank data does offer the opportunity to revolutionize offerings for consumers and financial institutions. Importantly, bank data also provides other companies such as fintech the opportunity to develop propositions for both consumers and businesses. In the future, it is highly likely that bank data will be used within an industry such as supply chain management, HR, recruitment, and more.

Interestingly, there is an even split between the application of open banking that is most impactful for consumers and those for business.

For consumers, the opportunity to make charitable contributions or get cash back on their purchases will drive awareness and acceptance of Open Banking. The difference that Open Banking and bank data are making to the mortgage and rental application process is significant. Massive savings in costs and time can be made by the vendor, while the consumer has a hassle-free experience, receiving a bespoke offer in a nominal amount of time. 

The business areas within financial institutions that are already benefiting from bank data and Open Banking include risk, compliance, fraud, account opening, and operations. All of these departments can make considerable savings in time and money, make better decisions, and enhance compliance procedures from capitalizing on the advantages offered by bank data.

COMING UP NEXT… Open Banking – Opening New Avenues in Banking (Part-2)

Banks foresee the risk of losing a valuable customer base due to the advent of Open Banking. Over time customers will use an array of highly advanced yet simplified banking products and services from multiple providers. This might yield lower returns for the banks. Banks are also concerned that customers may be exposed to a range of threats associated with security and data loss. The regulatory framework is yet to be strengthened. In the second part, we cover the risks associated with Open Banking and how these are balanced with the various opportunities that it brings.