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Open Banking – The Way Forward

April 23, 2018 - Rsr Prudhvi Raju

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Banking services will no longer stay as a bank’s prerogative. Banks and its proprietary channels will not necessarily be the only touch point for banking transactions. With the advent of open banking, ‘loyalty’ is no longer a customer’s obligation. You have to agree with Barney Hussey from Cleo, an API banking app, when he says, ‘The future of banking is with software companies, it is not going to be your traditional banks. It is who owns the data and who owns the experience. It is who you – the customer –trust to take financial products from’.
It’s now upon banks to provide more relevant and personalized solutions that match current trends, individual customer preferences, and the markets they are continuously in interaction with. However, it may not be easy to transform the legacy banking systems to support and deploy highly customized solutions.
An affordable way is to take the API route where banks can expose the consumers’ data on need basis. Of all the other data sharing methodologies, APIs have proved to be more secure and efficient. Thus APIs have become fundamental to the open banking phenomena. These APIs can be used by corporates, fintechs, third-party payment service providers, developers etc. to develop add-on services which give more value to the consumers, thus creating a new market place altogether.

In store for banks

While assessing the API strategy, one has to keep the profitability of banks in mind. This includes:

  • Cost of transformation to support open banking standards

  • Significant decrease in interaction time with customers

  • Lesser footfall on proprietary banking channels

While banks need to shoulder the above risks to push for a larger ecosystem strategy, open banking does come with rewards like:

  • Penetration to untapped markets through Fintechs. For example, rural markets, which remain highly untapped even today.

  • New and innovative revenue streams like acting as aggregator for APIs for other banks

  • More competitive lending products for retail and business consumers through data sharing with fintechs and agencies

  • Ability for smaller localized banks to compete with larger ones by increasing their penetration through wider offerings from the open banking market place.

It creates a truly competitive market in the banking space.

In store for customers

Customers are the ones who get most benefited from open banking from the word go. Personal finance space becomes more open to innovation if consumers can access different bank accounts in a single window, while also benefitting from add-on services like a few use cases as given below.
Hassle free liquidity management, where an approaching EMI date and insufficient funds triggers funds transfer from another bank account that saves penalty.
Credit score management by giving customers access to analytical dashboards and alert system, that will help them understand the impact of new loans or pending payments on their credit score. This in turn can improve one’s prospects for availing business credit or personal credit.
Better ROI on funds by providing highly personalized investment strategies and accurate assessment of risk appetite, by studying individual consumer transactions and other behavioral patterns.
Habituating micro savings using AI based predictive analysis to arrive at an average amount that a customer can save for that day / week or any particular period. Transferring the derived surplus to products with high ROI is also probable.
Better offers on loans from multiple vendors based on transaction history, which has high impact on appraisal, approval and processing timeline of loans, especially for non-banking lenders.

Flip side of the coin

There is always risk associated with openness. In this case it is data security. Unless data sharing is strictly governed by robust framework of security guidelines and protocols, it is very easy to lose the trust of consumers and up do all positive effects of open banking.
Governments and regulatory authorities around the globe have a greater role to play in giving the required push to decentralize banking.
European Union’s PSD2 is a welcome move that can help other new entrants onboard customers without much friction.
Open banking is here to stay. Banks can gain more by setting up a robust API strategy and the ones that start their journey earlier will stand to gain.
References

https://thefinancialbrand.com/70063/open-banking-digital-fintech-api/

http://www.wired.co.uk/article/psd2-future-of-banking

http://www.bbc.co.uk/news/resources/idt-sh/The_disruptors_money_changing

https://www.mckinsey.com/industries/financial-services/our-insights/psd2-taking-advantage-of-open-banking-disruption

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4 thoughts on “Open Banking – The Way Forward

  • good one. can detail more w.r.to a transaction how it is happening now and with openness how it will be.

  • This items nicely expressed by you along with eCommerce and digital currency are going to trigger one global economic with no borders, there are still legal items that must be addressed like money laundry and government s internal policies that could be a showstopper for such things to happen

  • Good article. Future offerings of banks could come from open banking concepts

  • Good article. Bank now needs personalized solutions to meet the customer needs.

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