Open Banking: A Threat or an Opportunity?

Disruption in the banking sector is an ever-growing issue presented by fintechs and other third-party outsiders, challenging banks to innovate and stay competitive. With the staggering rate of change, it might be most prudent for banking providers to partner with those innovators instead of resisting. This means tearing down the barriers financial institutions have historically used to protect their core business. As the concepts of open banking take hold in the marketplace, they will redefine the nature of relationships between banking providers, their customers and their other financial (or related) providers.

As new regulations open up new opportunities for businesses to compete in the financial services sector, open banking is going to alter the way banks do business. While some banking executives will be reluctant, the smart ones will view this as an opportunity for their banks to evolve digitally. With new technology, banks will be able to make better use of the data they already own to provide the personalized services their customers want and are finding elsewhere. In the long run, banks will stand to benefit while also meeting the increasing demands of their customers.

Changes to the Current Banking Structure

Banks currently have complete control over the data they’ve collected about their customers; affording them a “locked-in’ advantage and being able to prevent some competitors from gaining access. But this closed banking system will be drastically impacted under open banking regulations. 

Opening up the system to allow data to be controlled by the customer and shared with third-party providers means banks will loose the advantage over the broader view of their customers. This data sharing will give consumers real-time access to their banking data and change the way they transact, invest and save.

With consumers able to compare prices and rates; they will be more engaged as they choose to do business with institutions they trust. In this competitive market, banks will be challenged to develop more innovative solutions and show how truly customer-centric they can be.

Banks will need to Protect Consumers

Even though application programming interfaces (APIs) have been successful in other industries for years, banks will have the challenge to ensure consumer data is still protected and secure. There will be a shift away from a risk and permission structure in order for open banking to be successful. As more competitors enter the market, banks will still be charged with protecting consumers; starting with vetting potential APU partners to ensure consumers aren’t subject to unwanted marketing and predatory lending. Using their encrypted and aggregated data, banks will be able to create a robust system of security and governance.

Although this data sharing has inherit risks, it’s critical for banks to know they can overcome the challenges by developing processes and governance. When done correctly, banks can deliver increased security through enhanced customer knowledge and the deeper relationships thus created.

What Advantages Will Open Banking Bring?

Ultimately, open banking is a frame work from which banks will advance on their digital transformation. As technologically advanced competitors enter the market, banks will be forced to embrace and understand their digital channels. Open banking follows in line with consumer’s demand for more personalized service. Modernizing legacy systems is time-consuming, but by incorporating digital platforms banks will be able to offer more advanced features. Including things such as a product catalog with dynamic, flexible and event-driven pricing capabilities. With this new features and more, banks will be able to use their data to differentiate themselves in the market.

Specifically, banks can use this opportunity to take their services further to offer non-financial products. For example, banks could vertically integrate an entire buying process. So instead of just providing auto loans, they could use APIs to connect a customer’s financial data with a dealership’s inventory and offers; forming partnerships outside the typical scope and helping their customer’s make holistic buying decisions.

Additionally, life events are a valuable way to understand the motivations of a customer, but banks haven’t been able to leverage this in the past. Harnessing the power of digital platforms will allow banks to link this raw customer data to personalized events in order to drive loyalty. This will take banks away from a fragmented view of their customers to translating multiple customer experiences into one single action. With hyper-personalized, analytic-driven platforms, banks can more successfully navigate their customers’ data like never before.

Looking Ahead for Open Banking’s Influence on U.S. Finance

How open banking evolves in each nation will vary. In the U.S., the market appears to be the driving force for change, rather than a regulatory push similar to what’s taking place in Europe.

But nearly everywhere banks are facing an unprecedented level of change, from consumers demanding improved and personalized experiences to increased competition. Banks need to focus on their digital strategy in order to survive.

Banks who choose to embrace open banking will set themselves apart and show their value early on. Those that choose not to, or to evolve later, will be faced with an additional challenge in itself — third-party players and fintech companies will lure away their customers with innovative solutions.