The North American financial industry is exploring open banking, which began in the UK in 2018 as a set of regulations that requires banks to allow their customers to easily and securely share data with third parties such as other financial institutions or fintech companies. The idea is to allow competitors to combine it with data from other sources to create better offers for those customers.
Based on a collaborative model, data is shared through application program interfaces (APIs). This ensures customers can not only choose whether they share their data, but also enables them to make better, more well-informed financial decisions. Because these networks are made up of financial institutions that are unaffiliated with a customer’s home bank, customers can more easily compare similar product offerings in an efficient and effective way.
While this seems to have the greatest benefit for the customer, open banking offers significant advantages for financial institutions as well. Although open banking is not here yet, banks that are early adopters and partner with other financial institutions and fintech companies will become more competitive as they are able to leverage new sources of data to create unique, personalized services for their current customers.
Changing financial services as we know it
The collaborative, networked model of open banking may very well be on its way. North America governments have begun setting up committees and tasking analysts with exploring the merits of open banking. In Australia, the government is already moving towards implementing the regulatory framework for open banking.
The change will impact everyone from customers all the way to the CEO of financial institutions. Open banking will cause a disruption to the financial industry as banks are challenged to develop new ecosystems that address the changes they will face, including:
- Changes to the current banking structure
- Increased competition
- The ongoing (and increased need for) protection of customer data
- A need for better technology
- Lower costs for products and services which could lead to a short-term decrease in revenue
- Improved customer service
Changes in the current banking structure. The current closed model means that banks maintain control over all the information they receive from their consumers and they are the only source for traditional services for their customers. With the structure of open banking, banks won’t be the only ones to have access to their customers’ data. That naturally leads to:
Increased competition. The bigger banks tend to dominate the financial industry but open banking holds the promise to make the industry much more competitive. Customers want convenience and value for their money whether it’s the fees they pay or services they use. This demand, coupled with open banking, means banks will have to take a customer-first approach and rethink how they interact with their customers and what products and services they offer. Open banking gives banks the opportunity to partner with other financial institutions and/or fintech companies to provide superior products, services, and experiences for customers.
Increased data protection. The current system means that customer data is protected, but once data become readily available to third parties, banks will need to create a system that protects their consumers from phishing, cyberattacks, and other scams.
Need for better technology. Increased data protection creates a need for better technology to manage the complex tasks of authorization and authentication of customer data. This is where banks can proactively work with fintech companies. Not only can fintechs help develop secure APIs that protect customers, improve data management, and augment security, they can work with traditional banks to become digital-forward.
Lower costs of products and services. Customers currently pay high fees to access products and services like checking accounts. In Canada, for example, a survey by Ratehub.ca found Canadians pay hundreds to thousands of dollars in annual banking fees over their lifetime. U.S. banking customers pay high overdraft fees of up to $38 per item depending on their bank. Open banking’s innate competitiveness and choice would mean financial institutions will have to lower prices to keep customers and entice future behavior.
Improved customer service. Since a customer could consent to releasing their data to third parties to receive the best offers from competitors, financial institutions would have to make radical changes to keep their current customers. This means banks will have to change the decades of established behaviour and systems in place by breaking silos, hiring new staff, and implementing training throughout the bank to take a customer-first approach. This will cost money and time but is necessary to stay competitive.
The pros of open banking for banks
The first instinct for banks might be fear in the face of what is a dramatic change. These challenges are short-term but there are long-term benefits for banks who prefer to look at open banking as a chance to proactively partner with other financial institutions and/or fintechs, invest in technology, and refocus their value proposition to a customer-first approach.
Increased innovation. Open banking relies on open APIs so customer data can be shared between banks and third parties. Since APIs can look at consumers’ transaction data to identify the best financial products or services for them, banks can tap into that data and mine it to really gain an understanding of a customer’s financial situation and needs. This gives a bank the chance to be proactive and offer better financial solutions and products to a customer, such as lower interest rates, better mortgage fees and products, or better loan agreements.
Personalization of the customer experience. Again, this might look like a customer benefit but putting the customer first leads to increased personalization which leads to loyalty, retention, and lower churn for the bank. As mentioned in a previous blog, personalization is not a happy birthday push notification to a customer, it’s about solving customer problems by helping them achieve their goals.
Financial institutions who embrace open banking have more opportunities to engage with current and potential customers. This helps them gain a greater understanding of how consumers engage with products and services and their life stages and goals to provide genuinely personalized offerings that not only solve problems proactively but delight customers, increasing retention and word-of-mouth promotion.
Generate alternative revenue streams. Financial institutions can no longer rely on banking and transaction fees to drive revenue. Even now we’re seeing increased competition over no-fee and no-transaction accounts which is a primary consideration customers have when selecting a banking institution. With access to a greater depth and breadth of data, think of what a bank could develop and build for customers. Once the technology and training is in place, the opportunity to mine the data to create new products, services, and customer experiences could lead to new offerings and new revenue streams.
Staying competitive. Although various world governments are researching open banking, it will take some time before open banking is a standard part of the financial industry. Instead of waiting for a green light, financial institutions should start now by building the foundation for open banking and taking advantage of partnerships to access and leverage the technology needed to improve customer loyalty and, in turn, increase sales.
The financial industry continues to experience disruption and with open banking potentially on the horizon, financial institutions should embrace the opportunity to stay relevant. Innovation will be critical to deepen the connection with customers and create new forms of revenue.
Adapting to disruption can be time consuming and expensive but, thanks to an already healthy fintech sector, financial institutions don’t have to shoulder the entire burden themselves. Instead of creating new technology to compete, financial institutions should develop partnerships with fintech to leverage their technology and share their data. Incorporating open banking concepts into their digital strategy through partnerships with other financial organizations could be the key to rising above the competition.
Financial institutions can stay the same and get left behind or see what open banking really offers: the ability to use technology to drive lifelong engagement with customers in a way that puts them first.