A lot of people have the misconception that getting banks to change is like pulling teeth. It's a misplaced analogy, first because banks really are more open to embracing emerging technologies than most people think, and second because the last time pulling teeth was painful was probably around 1846, when the first successful surgical procedure was performed with anesthesia.
The concept of Open Banking appears to inspire this sentiment, as a lot of people (non-bankers, mostly) seem to think it will either drive banks crazy or compel them to fight against the concept. This doesn't make sense because Open Banking has the potential to open up a wide array of business opportunities for banks, by helping them become platforms.
Let's take a step back to look at what Open Banking means. Simply put, it delivers enhanced capabilities to the marketplace using a collaborative model where a customer's banking data is shared between two or more unaffiliated parties using APIs. In simpler terms, it allows the sharing of hitherto privately-held resources which, in turn, encourages better products and services to manage a customer's money.
How Did Open Banking Come About Anyway?
Like so many cool things — the space suit, telephone, pizza — the concept of Open Banking was born in Europe. The European Union wanted to create a unified payment area allowing for local and international non-cash transactions that could be made at standardized rates, as easily as within national borders. It was a difficult ask because banks initially thought of the move as disruptive, but it's amazing what a little legislation can do to smoothen things out.
What This Means For Financial Institutions
Open Banking gives customers access to all their accounts in one place, irrespective of how many they have in different banks. It also enables easy switching between providers, opening or closing accounts, and simpler payment initiation, empowering customers to make informed choices from market data that is publicly available.
Naturally, this means there are all kinds of opportunities for adaptable start-ups that can access client data and offer banking services because they will not be bound by heavy legal regulation or capital requirements that are compulsory for banks.
Having said that, financial institutions stand to see a lot of benefits too. For a start, Open Banking can help with automating onboarding, as manual inputs by customers could be collected through APIs, allowing advisers to focus on value-adds. It also encourages dynamic financial planning as banks get clearer insights into how consumers manage their finances. New tools can be created for customers, allowing them to make better financial decisions. Providers may be able to offer personalized product recommendations based on disposable income, levels of debt, tax efficiency and existing insurance policies. Finally, it allows advisers and wealth managers to target digital-first clients.
Does Open Banking Make Business Sense?
It certainly does, for a number of reasons starting with improved customer experience. Another reason is the creation of new revenue streams, followed by a sustainable service model for traditionally underserved markets. Open Banking can position financial institutions to play leading roles and capture a larger share of wallet by participating in larger profit pools. It's why a report by PwC in June 2018 pointed to the possibility of the market generating more than £7.2bn by 2022 if banks, fintechs, credit scoring agencies and tech giants tap into its potential.
Are You Ready For Open Banking?
If this sounds like a bandwagon your organization would like to get on — and you really should consider it — here are a few pointers that come to mind in terms of what you should work towards:
- Data sharing: Evaluate your agreements with fintech and non-financial services to look at how things stand.
- API Strategy: This should be looked at from the prism of how third-party access can benefit a financial institution's service model as well as customers.
- Privacy and Regulation: What regulatory bodies does your financial institution fall under the purview of, and what will compliance mean?
- Messaging: This will be driven by data privacy mandates and what position you choose to adopt in terms of allowing access to customer information.
We, at NexJ Systems Inc., are still intrigued by what Open Banking means for financial institutions in North America, because there is much to be covered as far as regulation is concerned. We see real opportunities with regard to data integration, of course, while recognizing the importance of compliance with General Data Protection Regulation (GDPR) around the flow of data. If you have questions or recommendations (perhaps even tips on pulling teeth painlessly), we’re always happy to chat.