The Open Banking or API banking economy is here to stay, egged on by the increasing adoption of Open Banking by markets across the globe. This technology trend has heralded the next phase of disruption in the banking industry with many governments making it mandatory to comply with Open Banking regulations (CMA UK Open Banking, Berlin Group, Stet, Polish Bank Association, Slovak Banking Association, NACHA, Association of Banks in Singapore, Honk Kong Monetary Authority). Among the many benefits from Open Banking, financial inclusion, customer experience, and business innovation make for a compelling case. The UK, Singapore, USA, Sweden, and the Netherlands are regarded as pioneers in OpenBanking readiness, while France, Belgium, Finland, Australia, Germany, Spain are followers, and India, Italy, South Africa, China and Brazil conservatives, according to an assessment from the World Payments Report.
The essence of Open Banking lies in enabling better and healthier collaboration within the financial ecosystem of banks and financial institutions, third party providers (TPPs), and FinTechs. Open Banking provides a platform for information exchange through APIs between two or more parties, usually banks, and FinTechs and TPPs. Traditionally, core banking was the forte of banks while TPPs and FinTechs drove much of the technological innovation. However, this will change in the Open Banking era, thanks to sharing of customer information between the various players. Herein lies the opportunity for banks, that up till now acted as stewards of customer data, to capitalize on the huge potential of this securely guarded vault of data.
- Typically, TPPs profile banking products and services, and provide a comprehensive summary to their customers. Since they work with multiple banks, they also provide a comparative assessment of banking products, services, and even experiences across banks. A bank that chooses to stay ultra-protective of its customer data or product information ends up providing insufficient information to TPPs, and eventually to the customer. This has a negative influence on the choices available to customers and will affect their buying decision.
- Sharing relevant data is winning only half the battle. To win in the ultra-competitive marketplace, banks have to offer differentiated products and services. Banks need to mine their wealth of customer data, invest in customer analytics, and build a strong market research function. It is also important to share the right information, in this case, unique features of their products to really capture their customer’s minds.
- So, the offering is differentiated, and data is shared with the TPP. Despite a bank’s best efforts, customers may choose not to engage with them. In such cases, banks need to have a wholesome approach to their partnership with TPPs, that allows them to analyse ‘customer drop-out’ use cases. A visual representation of the customer’s journey is also suggested. This helps banks identify potential causes and possible loopholes in their offering to plug these gaps immediately and create a blueprint for better customer engagement.
Conclusion: Open Banking is both a boon and a bane for FIs, depending on how adept they are with innovation. Not adapting to the open banking disruption will severely restrict banks from expanding their customer base, since TPPs can now start competing with larger banks thanks to better, more open sharing of customer data. To succeed, FIs should shake away the cobwebs of conventionalism, and build a third-party provider mindset. Not only does this set them up to compete with other providers but improve their brand identity by focusing on efforts to become truly customer-centric.
OPEN BANKING WHITE PAPERS
Download our white paper, Open Banking: The New Customer Frontier to learn more about how Open Banking will revolutionize the banking and financial services industry.
We also examine what banks and other financial services companies can do to meet the initial challenge of transformation and then to go beyond that first step by developing new business models that will anticipate changing consumer demands and build the winning companies of tomorrow. Download here
Download our new white paper, Open Banking Beyond Compliance
to learn about why monetizing Open Banking APIs is vital for long-term success.
In this white paper, Virtusa surveys the current Open Banking landscape and puts forward recommendations for effective API monetization, including API pricing models, risk and quality control mechanisms, potential new business models, and strategies for open banking. Download here