The banking industry has been constantly evolving to incorporate technology and provide the best possible features to consumers. With the ever increasing prominence of digital banking, the spotlight is now on open banking and its capabilities for changing the global landscape of banking and finance.
Open banking is basically the practice of sharing consumer’s banking and transaction information, along with other financial data, with third party financial service providers. This information is shared through the use of application programming interfaces i.e. APIs.
First and foremost, customers must grant access to the bank to share their data, in a secure manner, by selecting a checkbox and accepting certain terms and conditions on digital apps. Once approved by the customer, banks allow third parties such as technology start ups and online financial service vendors to access customer data ranging from customer account details to transaction history.
The power of open banking
Open banking not just provides customers’ data to service companies, but opens the possibilities of this information being utilized to gain insights and drive actions.
1) More personalized suggestions for improved customer retention
By accessing customer’s transaction data across multiple platforms, it is possible to identify the best financial products and services for them. A new savings account that would earn a higher interest rate than their current savings account or a different credit card with a lower interest rate are some of the possible suggestions which will enable customers to make informed decisions.
2) Understanding risk appetite
Open banking could help banks and lending organizations to get a more accurate picture of a consumer's financial situation and risk appetite. This ensures that more profitable loan options can be suggested while giving consumers an accurate picture of their own finances before taking on debt. An open banking app for customers who want to buy a home could automatically calculate what customers can afford based on all the information in their accounts, perhaps providing a more reliable picture than mortgage lending guidelines currently provide.
3) Differently abled friendly interfaces
Traditionally, financial data resides within banking institutions and very few of them have digital apps which have interfaces that are flexible enough to be used by differently abled customers. Open banking gives technology companies the opportunity to explore how to make inclusive applications that provide user interfaces with voice commands and simplistic navigation. This empowers differently abled individuals to better understand their finances independently.
4) Driving innovation
Since smaller banks and FinTech will utilize open banking to develop third party services that focus on lower costs and increased customer engagement, it will force established banks to be more competitive. Established banking institutions can no longer simply facilitate transactions. They will have to actively be involved in adopting new technology and developing innovative ways to enable their customers to plan and manage their finances.
5) Faster support for small businesses
Loan approval processes for small companies tend to be long and cumbersome. Lending organizations review the account and financial statements of the company before making a decision. Open banking makes it possible for lenders to pull and analyze data from the banking and accounting systems in real time which expedite the process. While any submitted reports can become outdated by the time of review, real time data ensures that only the most updated financial situation of the company is under review.
The future of open banking
Open banking and APIs are going to be the driving factors leading to innovation in the world of FinTech in the upcoming years. Its benefits will not just serve banks and third party vendors, but also consumers across the world, by giving them a plethora of options to choose from for managing their finances.
Enhancing banking services, empowering consumers’ understanding of finance, enabling banks to scale more freely and function in real-time, reducing the liability on physical institutions, and simplifying the process of uploading and processing financial records are just a few of the many promises that open banking has to offer.
As the open banking space evolves, it is imperative to stay educated about the power of data and how it can be incorporated by businesses to reshape the competitive landscape of the banking industry.
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