Open Banking: what it is, how it works and why to invest now
just as with the rest of the market, banks face numerous challenges with Digital Transformation. The growth of Fintechs – startups that provide financial services that use software and other modern technology resources – is an example.
The banks’ challenges with Digital Transformation
Before we go deeper into the Open Banking concept, we need a contextualisation: just as with the rest of the market, banks face numerous challenges with Digital Transformation. The growth of Fintechs – startups that provide financial services that use software and other modern technology resources – is an example.
Unlike traditional banking institutions, Fintechs have realised early that financial services of all kinds (money transfers, loans, investments, payments, etc.) need to integrate perfectly into the lives of today’s modern and sophisticated customers. Thus, they arise taking advantage of the business and private life digitisation movement.
The strength of this new development lies in the use of emerging technologies such as Big Data and Artificial Intelligence, which are used to optimise the consumer experience and fill gaps in the financial system.
Also the big techs, tech giants, are eyeing the financial industry and are daring enough to threaten the banks’ hegemony. Amazon, Facebook and Apple, for example, already experience financial transactions, especially for payments.
In addition to the competition with Fintechs, the industry itself must compete with each other to provide better quality customer experience, innovate, differentiate, bring process automation to a new level, in the ever-increasingly hyperconnected world.
But, most of the time, banking institutions don’t have tech-innovation professionals to think, develop and implement new products aside from 100% digital services that are aligned with consumers’ wants and needs.
All of this has created the perfect environment for a fully digital financial ecosystem in developed countries and a rapidly changing system in developing ones; a reality that knocks on the established banking organisations door.
Open platform banking, public APIs and outsourced applications are in operation, giving the cards in the segment and waiting for partnerships (with startups, IT companies, etc.), unprecedented in preference.
What is Open Banking
Open Banking is a term that refers to Open Innovation methods designed exclusively for the banking industry.
Within what we call Open Banking is the practice of collaboration between traditional banking institutions with startups, Fintechs and technology companies. These partnerships result in innovative solutions and applications.
And this is only because application programming interfaces (APIs) allow third parties to access financial information efficiently, which promotes new applications and services development. They also facilitate the collection and sophisticated analysis of exponential volumes of data.
Open APIs are great opportunities to create new banking business models, initiating the much-needed Digital Transformation process, responsible for taking financial institutions out of the comfort zone and guiding them toward user-centric strategies.
Open Banking proposes the elaboration of products and services online, 100% digital generating advantages for the end-user. Yes, the idea is not to solve the bank and its developers’ problem, but that of its consumer.
Ideally, an Open Banking strategy should result in a better experience for consumers. The difference between the concept and other routine strategies in the market is the new scenario created by it, in which account holders access services and bank functionalities from third-party sites and applications.
The financial institution ceases to exist only in its own domains and begins to have contact with its client in other digital spaces, expanding its performance, public, services portfolio and time of contact.
The bank’s open API platform must be able to connect the account holder, more specifically, his information, to other platforms of his choice. The power of choice is the user’s; the data connection is from a financial institution.
What looked like a distant future is already a reality and is causing many a ‘sleepless night’ for banking institutions around the world, who are chasing to take back the ground from the Fintechs.
Impacts of Open Banking
Innovative financial technology initiatives are rapidly stimulating adoption in developed markets such as the UK, Germany, and the US. But there is a great opportunity in emerging markets that can benefit greatly from an open banking standard. For example, in Latin America, only 51% of adults have a bank account.
Instead of “fighting” just for this active percentage, it’s interesting that banking organisations focus on helping those who are interested in financial services to find the right product, and they can do this more efficiently with a good Open Banking strategy.
On the other hand, banks are great platforms for generating informational inputs. An infinity of transactional data passes through their systems all the time. If data is the new oil, the banking industry has a gold mine in hand.
The Open Banking approach follows a trend that is gaining more and more strength and relevance in the market: the API-fication, where transactional data is customers’ property rather than the Bank’s – and they decide how to use them.
Starting with cybersecurity, the open bank helps clients securely share their financial data with other institutions through the use of programming interfaces, better known as APIs.
In short, in Fintechs’ time, an Open Banking strategy creates new competitive levels, encourages technological and business innovation, and puts the customer experience at the center.
7 Reasons to Invest in an Open Banking strategy
Here are the seven advantages that an Open Banking strategy can offer your bank or why it is worth investing in this trend:
- Monetisation of services: a significant increase in profitability, from better use of data in order to meet and serve customers more efficiently;
- Cost reduction: better use of technology to reduce spending for the banking institution and for customers and partners;
- Improved customer experience: differentiation of competition within the industry and between Fintechs and big techs, from consumer satisfaction;
- New products and services: that create a disruptive culture to generate the most profitable products and services to meet the needs of the target audience;
- Optimisation of development and research of solutions: through data strategies, it is possible to make research and development more efficient, fast and cheap;
- Accelerating digital transformation: by partnering with startups and IT companies for strategy, for example, it is possible to bypass the barriers to digital transformation;
- Value gain: in addition to the customers’ perception and other stakeholders, banks that work with open innovation raise their overall market value.
How to prepare for Open Banking
As you’ve seen, Open Banking’s efforts are big business for banks, startups and IT companies. They also favour customers and, with the industry moving this way, they can modify a country’s economic ecosystem.
To conclude, we recommend two initial steps for banking institutions that want to make open innovation their leap into the future:
It is essential to overcome the past and create a culture where processes and services are thought and executed in the digital environment. User-centric strategies, agile ecosystem (especially for IT), risk management and process debureaucratisation, among other initiatives, are part of this effort. With the help of expert consultancies and leadership training, it is entirely possible to implement a digital mindset in a shorter time.
We also recommend incremental investments in internal API platforms, APIs open to the public, cybersecurity, and cloud computing. All this to build an infrastructure that supports and guarantees reliability to Open Banking strategy.
MJV Innovation Lab
We are at your disposal to help your bank implement an Open Banking strategy. Through our MJV Innovation Lab, we can assist you in this effort. We already have several successful cases with national and international banking institutions.
Click the link below to contact us and see how we can help!