Financial Services

The future of open banking and why banks should take the lead

Open banking refers to a system that enables customers to securely share their financial information with third-party providers. This sharing of information enables customers to access an extensive array of financial products and services beyond what their traditional banks offer.  As the world becomes more interconnected and digital, the future of banking lies in embracing open banking. Banks that take the lead in this new era of finance will not only be better positioned to serve their customers but will also be able to innovate and create new revenue streams.

A recent State of the Nation Survey 2022 covering global financial institutions and banks by Finastra says 99% of respondents classified open banking as a must-have or essential feature of a bank. It also mentioned retail banking, payments, and corporate banking as the three top areas of impact of open banking. An article by Jim Marous, the CEO of the Digital Banking Report, published in The Financial Brand, mentions open banking as a primary focus area for financial institutions in the next three to five years. A Polaris Market Research study predicts that the global open banking market size will reach USD 128.12 billion by 2030. All these insights indicate that open banking is a significant global industry trend.

Let us briefly glance at open banking to see why it is trending.

Open banking operations

Open banking practices provide third-party financial providers access to banking data and consumer banking through Application Programming Interfaces (APIs). The third-party service providers are typically tech startups, online financial service vendors, and other non-traditional players. It is a pivotal fintech innovation poised to reshape the competitive banking landscape driven by consumer demand for enhanced services and control over their data. Regulations and technological innovations enable secure access to banking data giving rise to digital finance solutions such as Banking as a Service (BaaS). Open banking has benefits for both customers and bank employees as the systems provide customers access to more banking offerings through secure transactions, while employees benefit from streamlined and automated processes.

The European Union mandated open banking and APIs under its Payment Services Directive 2 (PSD2) regulations in 2015. While a few countries have adopted a regulatory approach, many have formal and informal initiatives around open banking to spur its adoption to ensure data security and privacy.

These changes have resulted in many revolutionary digital transformation financial services like network-agnostic payment systems. It is becoming easier for businesses of all sizes to provide tailored offerings to their customers through this new API-based ecosystem.

So, where do banks stand in this changing landscape?

While open banking will benefit customers and third parties, what will banks gain by providing access to their valuable data? Well, it enables them to serve their customers better by providing access to diverse fintech products and services, and consequently stay competitive. One of the biggest challenges the banking industry has faced recently is from fintech companies, non-traditional players, and even big tech companies. By adopting open banking systems banks can become flexible and adaptable enough to meet customer expectations and this in turn will aid customer retention.

Here is how taking the lead in open banking adoption can benefit banks

Convert competitors into partners:

Not all banks will have the resources to build new digital products, such as digital accounts payable internally. Open banking allows such banks to leverage new technologies by upgrading their legacy platforms through partnerships with tech providers in the ecosystem. Instead of competing against third-party incumbents, banks can partner with them through innovative revenue-sharing models and co-create new financial products to increase their customer base. This approach will help them stay relevant and become more competitive.

Realise the potential of customer intelligence:

Banks can use customer data insights to shape better customer journeys. The consolidated customer data connected in real-time through universal APIs will help banks leverage behavioural and transactional data to make better decisions. They can find new customers, create tailored offerings, cross-sell products, build partnerships, and generate new revenue streams. Customer data insights can also shape robust data governance policies by understanding customer preferences on data sharing.

Evolve new business models:

Most banks are rethinking their business models currently, states The Financial Brand article quoted above. The significant shift in business model deployment is the expected increase in open platform players – from 8% to 26% in 2030. This change will lead to product diversification with improved value propositions such as wealth management and investment services.

A McKinsey article titled, The future of banks: A $20 trillion breakup opportunity, states that “banks should decide which arenas and business models to focus on, based on their strengths, as part of their digital transformation over the next five to ten years”. It further says that only those banks that successfully make the transition will grow and become profitable. It is, therefore, a question of seizing the opportunity and making the best out of it.

Indeed, banks are currently undergoing a radical transformation led by customer preferences and technological advances. Open banking provides them the much-needed impetus to move away from the traditional banking arenas and create new ones to build new revenue streams and a loyal customer base. The survival and success of banks in these turbulent times will depend significantly on their open banking integration strategies.

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