Banks have embarked upon digital transformation processes, to remain competitive and to better meet consumers’ expectations. New models, such as Open Banking, are now available to them. These enable private individuals and small businesses to share their banking data with third-party service providers, with a view to being offered innovative and personalized services. In such a system, for example, a couple can use an application that analyzes its finances so as to establish a monthly budget; a self-employed person can connect accounting software to their bank account to fulfil their accounting requirements.
One of the promises of Open Banking is to facilitate access to bank financing for people who were previously excluded.
The adjective “open” doesn’t mean this model does not come under strict security standards. Open Banking is regulated by the financial authorities of the countries in which it is established: only providers authorized by a regulatory authority can access clients’ accounts, clients do not share their user identifications or passwords and they choose the terms for sharing their information. Furthermore, it uses advanced protection software and systems.
APIs at the heart of the open banking model
Open banking is at work in the United Kingdom, Brazil, and other countries across the world. In the European Union, the Revised Payment Services Directive (PSD2) constrains banks to share their clients’ account data – with their express approval – to third parties. This must be done through a secure method of communication, application programming interfaces (API), which are set up by the banks themselves and adhere to a certain number of technical standards.
Instant bank transfers and other services for clients
Open banking introduces a wide range of banking and financial products and services to consumers, who can pick and choose according to their needs. These solutions include:
- Payment platforms that enable instant bank transfers between individuals for example.
- Bank account aggregators, such as Bankin’ or Linxo, which consolidate all of a person’s accounts from one or several banks into a single interface. These applications enable clients to view their finances all at once and to access several practical functionalities such as transaction categorization.
- Applications dedicated to personal financial management that offer detailed tracking of spending and help people to set up a budget or build a savings strategy.
- “Cashback” offers, whereby a percentage of the consumer’s money spent with a given brand is put back into their account. For example, Orange Bank offers its clients a reimbursement of 5 % of their Orange mobile and broadband bills as well as their online or instore purchases.
Refined customer data for providers
One of the interesting promises of Open Banking is to facilitate access to bank financing for people who were previously excluded. Combined with new technologies such as machine learning, it gives third-party providers access to larger datasets (including, in particular, bank statement history) making it easier to report on the client’s true behavior and financial situation. This should make it possible to go beyond the usual criteria considered for traditional credit scoring (which calculates credit risk) and to make easier and faster decisions.
New opportunities for banks
Open Banking may have introduced new obligations for banks and financial institutions, but it also provides them with new opportunities.
In a highly competitive environment, with the arrival of a multitude of new players, it is essential that traditional banks remain innovative and provide an appropriate response to the changing needs of their clients. Having taken a user-centric approach, technology companies, fintechs and neobanks have brought along new ideas and changed consumers’ habits.
This ecosystem, and the increasing use of APIs, could help banks to broaden their offering and accelerate the development and market launch of their new products and services. This results in an improvement in the relationships between a bank and its historical clients, as well as potentially new sources of revenue.
Open Banking is an internal lever for innovation for banks. They can use APIs to modernize – without completely redesigning – their information system and transform existing company processes. This can help give them more agility and flexibility as well as reduce costs (for example, by connecting data and allocated resources to the different channels, both web and mobile).
In several places across the world, a favorable regulatory framework is fostering the progressive uptake of Open Banking by banks, who are moving forward cautiously. Some countries are at the forefront in the field, such as the United Kingdom who were the first to deploy a true open banking system, with fast uptake by all stakeholders (banks, third-party providers, clients). Others are still in the early stages of this new model which, with the help of new players, is making the most of the opportunities provided by APIs to sustain competition and innovation in the banking sector.