Open banking is changing not only the traditional characteristics of banking but also the broader financial sector. It is a development that inspires innovation within business and customer data ownership, and many believe it may revolutionize the financial ecosystem. The concept, however, is not widely known, and there are many misconceptions.
Here is everything you need to know:
The prospect of managing sensitive financial data and consenting to data-sharing with unknown third-party providers may make many people nervous. However, not only is open banking safe, it also increases data security:
In fact, many consumers may not be aware that they are using the technology that enables open banking. Online transactions use an API at some stage of the process.
Open banking should provide consumers with immediate savings in time and cost. The access to data and the ability to aggregate, view and control financial information on one platform will produce a streamlined, more convenient banking experience, increase transparency, and assist the customer in making more informed financial decisions.
For the adventurous, energetic entrepreneur, the possibilities are many. Fintechs and other businesses can use their access to detailed data analysis to:
Open banking creates profound change in the financial services sector, fragmenting the market and making it easier for new entrants. In this environment, banks have a natural advantage. Traditionally, customers have been reluctant to move banks and hesitant to engage with unfamiliar organizations when it is a question of finances. A US study from 2018, for example, shows that only four per cent of US consumers switched primary banks that year. Consumers may shop around and open accounts with other banks, but they tend to keep their accounts and relationships with their primary bank.
Banks, therefore, benefit from brand recognition and market experience, resources they can leverage. But like their competitors, banks will be able to benefit from access to data. They can use this granular open banking data to strategize a way to future success by:
To do this, they need to invest time and resources to understand the various elements of the customer journey, assess their strengths and weaknesses in this context, and understand the necessary infrastructure and technology required.
Several countries, such as the United Kingdom, Hong Kong and Australia, have introduced open banking regulations. Others are preparing to introduce regulations, including India, Japan, Singapore and South Korea.
In the Middle East and North Africa, Bahrain launched an open banking framework in 2020, the first country in MENA to do so. The United Arab Emirates introduced licences to authorize third-party operators to become account information service providers (AISPs) and payment initiation service providers (PISPs). The Kingdom of Saudi Arabia recently implemented an open banking policy as part of its Vision 2030 plan.
Other countries expected to introduce open banking regulation soon include Egypt, Jordan and Morocco.
While there are regulatory differences between countries, one common point is that banks must open their financial data to third-party service providers through an API.
Open banking provides banks, fintechs, financial service providers, and third-party operators access, with customer consent, to a wealth of data that’s never been available on such a scale. Applying sophisticated and automated analytical tools to that data delivers profound, rich insights that are likely to spark innovation and development. Organizations will have the knowledge to design new services, tailor services to profitable niche markets, and enhance existing services.
The ability to share verified data should also reduce redundant processes, such as duplicated identity authentication across platforms, that delay, price gouge and cause frustration.
With so many opportunities ahead, it is nearly impossible to predict how open banking will develop. Consider the digitization of maps as an example. Initially intended to provide convenient guidance for travellers, digitized maps provided the infrastructure and connectivity on which several successful global businesses, such as ride-sharing, based their services. It won’t be long before enterprising innovators and business leaders see opportunities to leverage open banking technology in the same way. The possibilities are limitless.
We can only speculate at what open banking will bring.
Well, if you didn’t know what open banking is, now you do! And, if you’re wondering how to get started, we have you covered. Whether you’re a bank or a business working within the financial services space, you can access real-time financial data with customer consent through our open banking APIs and our TG Connect solution.
To start building the next open banking-powered financial technology, sign up to our Developer Portal.