Over the past decade, API-based open banking infrastructure has increasingly allowed individuals around the world to grant trusted third parties secure access to their bank account data.
- Open banking is transforming financial services, benefiting banks, corporates and consumers.
- Companies need to understand the how they can use the emerging suite of open banking tools to improve outcomes – for their organisation and customers.
- Open banking will require a new mindset and potentially significant investment on the part of banks, FIs and other ecosystem participants.
By empowering customers to share their financial information – ranging from their name to transaction history – with third parties, open banking creates new opportunities for payments and bank account authentication.
The US has taken a different approach to open banking compared to much of the rest of the world. Regulators in Europe and the UK have mandated open banking. In the US, the Consumer Financial Protection Bureau (CFPB) issued only non-binding guidelines on how banks can allow customers to make their data and account actions available to third parties, although a push by the CFPB to mandate open banking is expected soon. Instead, US banks and other financial institutions (FIs) have led efforts to develop an open banking infrastructure.
Banks have traditionally collaborated and established infrastructure, such as clearing houses and faster payment services, to improve customer service. But in permitting new third-party providers to access bank data and infrastructure (with customer consent), open banking represents a profound shift that could foster product innovation, price competition, and greater accessibility to financial services.
Delivering immediate and long-term benefits
The adoption of open banking is gathering pace in the US, but its implications are only just starting to be felt; many firms are still figuring out how these tools can apply to their business. Banks, non-bank FIs (such as credit card companies, mortgage lenders and brokerages), e-commerce retailers and businesses in any sector that use a large volume of ACH transactions need to assess how the open banking ecosystem will evolve, and what role they will play in it.
Organisations that are considering incorporating open banking solutions into customer journeys or product design can start by assessing their existing approach. Then they can evaluate how they can use the emerging suite of open banking tools to enhance security, improve convenience, lower costs, and deliver other benefits that would advantageously position them for the future. While the immediate benefits of open banking solutions are likely to be enhanced security and customer satisfaction, in the longer term they could revolutionise customer journeys and facilitate business model innovation.
Early adoption of open banking tools has the potential to future-proof a business. Demographics, technology trends, and growing investments in open banking infrastructure suggest that these solutions will become the preferred approach for many consumers, who increasingly expect transparency, simplicity and seamless integration. Open banking paves the way for feature innovation that can deliver these benefits and transform the customer journey across payments, KYC/AML vetting, identity capture, pre-population of applications and many other areas.
Firms can also use customer transaction data to provide more personalised services or integrate payment processing where they or their customers currently rely on third parties, reinforcing their relationships with customers and growing their business.
A smart approach to implementation
Open banking will require a new mindset and potentially significant investment on the part of banks, FIs and other ecosystem participants, but the benefits of early engagement are significant for everyone.
Banks and FIs will gain an opportunity to improve security, customer satisfaction and differentiate themselves with new services, while customers should benefit from lower pricing from increased competition, as well as gaining access to personalised services and easier provider switching. Third-party providers stand to gain better data for underwriting and a reduced KYC workload. And all of this looks attractive from the perspective of regulators.
The way that open banking is implemented is important, however. Firms may be reluctant to embrace open banking because of concerns that some of their customers may prefer their current customer journey. But any potential downsides of open banking can be easily managed through smart adoption. Instead of compelling customers to take one approach over another, firms can adopt a waterfall approach that combines open banking and traditional approaches.
Take account authentication as an example. A traditional approach (such as a bank database check) can be used in the first instance. For customers who cannot be easily validated in this way, an open banking solution can be deployed. This combined approach gives firms the best of both worlds. They are able to achieve the highest levels of security and customer convenience today while positioning themselves to expand their use of open banking tools in the future.
GIACT’s latest white paper landscapes the current uses for open banking products and their impacts to date, explores future applications, and helps firms understand how they can use the emerging suite of open banking tools to improve outcomes – for their organisation and customers. Download now.
