Open Banking- The New Age of Finance

Open banking is a financial services term as part of financial technology that refers to

1 The use of open APIs that enable third-party developers to build applications and services around the financial institution.[2][3]

2 Greater financial transparency options for account holders ranging from open data to private data.

3 The use of open source technology to achieve the above.[4]

Open banking, as a concept could be considered as a subspecies to the open innovation concept, a term promoted by Henry Chesbrough. It is linked to shifts in attitudes towards the issue of data ownership illustrated by regulations such as GDPR and concepts such as the open data movement. The banks turn into financial service platforms, technically implemented through a Banking as a Service concept.

Understanding Open Banking

Under open banking, banks allow access and control of customers' personal and financial data to third-party service providers, which are typically tech startups and online financial service vendors. Customers are normally required to grant some kind of consent to let the bank allow such access, such as checking a box on a terms-of-service screen in an online app. Third-party provider APIs can then use the customer's shared data (and data about the customer's financial counterparties). Uses might include comparing the customer's accounts and transaction history to a range of financial service options, aggregating data across participating financial institutions and customers to create marketing profiles, or making new transactions and account changes on the customer's behalf.??

The Promise of Open Banking

Open banking is a driving force of innovation in the banking industry. By relying on networks instead of centralization, open banking can help financial services customers securely share their financial data with other financial institutions. For example, open banking APIs can facilitate the sometimes onerous process of switching from using one bank's checking account service to another bank's. The API can also look at consumers' transaction data to identify the best financial products and services for them, such as a new savings account that would earn a higher interest rate than the current savings account or a different credit card with a lower interest rate.

Through the use of networked accounts, open banking could help lenders get a more accurate picture of a consumer's financial situation and risk level in order to offer more profitable loan terms. It could also help consumers get a more accurate picture of their own finances before taking on debt. An open banking app for customers who want to buy a home could automatically calculate what customers can afford based on all the information in their accounts, perhaps providing a more reliable picture than mortgage lending guidelines currently provide. Another app might help visually impaired customers better understand their finances through voice commands. Open banking can also help small businesses save time through online accounting and help fraud detection companies better monitor customer accounts and identify problems sooner.

Risks of Open Banking

Open banking may offer benefits in the form of convenient access to financial data and services to consumers and streamlining some costs for financial institutions. However it also potentially poses severe risks to financial privacy and the security of consumers' finances, as well as resulting liabilities to financial institutions. Open banking APIs are not without security risks, such as the potential for a malicious third-party app to clean out a customer's account. This would be an extreme (and less likely) threat. Much broader concerns would simply be data breaches due to poor security, hacking, or insider threats that have become relatively widespread in the modern era, including at financial institutions, and will likely remain commonplace as more data becomes interconnected in more ways.?

Open banking is likely to alter the competitive landscape of the financial services industry, which could benefit consumers by increasing competition as described above, but could also have the reverse effect and increase consumer costs if it leads to consolidation in financial services, due to the natural economies of scale from big data and network effects. Resulting from market concentration and associate pricing power could more than offset any cost advantages to consumers. Such market consolidation has already been seen and widely criticized in other Internet-based services, such as online shopping, search engines, and social media, in that it is widely believed by consumers and regulators to result in misuse of customers' data by tech giants for their own benefit. Beyond the direct costs of market concentration, similar misuse of customers' private financial data could ultimately raise even greater concerns.

Global Open Banking Developments

Here are five examples of the most popular open banking use cases:

Account aggregation

This is probably the most popular one. Account aggregation is already offered by a number of financial services companies. It involves using an API to allow customers to get an overview of their various accounts.

Account aggregation means customers can see multiple accounts from different providers on one interface. It’s not just straightforward payment accounts either, which the PSD2 framework gives access to. There are examples of where you can view credit cards, investment accounts and loan accounts in one place, as well as combining consumer and business banking in the same interface.

Personal finance management

There has been a big increase in personal finance management (PFM) tools in the latter years. These tools are meant to give the customers a complete overview of their financial situation. For example, this can be placing payments in different categories or showing how much money the customer has left to spend this month. Dedicated software allows PFMs to pull in information from various accounts into one informative interface.

Having data centralised can help banks and financial providers get a clear idea of what customers would benefit from and it also gives a customer a clear picture of how their money is performing for them. It creates financial insights.

Of course, financial management and wealth management pre-date its arrival, but open banking has unlocked some of the possibilities within a PFM. Both when a bank is connecting its own APIs across different business units, but also in connecting to API’s at other banks. Open banking has contributed to a greater proliferation of financial management services. Thus offering choice to the customer and opportunities for providers to offer a range of tailored products.

Instant credit risk

Open banking can rapidly speed-up credit applications by allowing lenders to gain an almost instantaneous overview of an applicant’s credit history. Prior to that, assessing applicants for credit often involved pulling together different documents from different banks and institutions. This?process not only slowed down the delivery of credit services but led to a negative customer experience.

Gaining access to a raft of instant banking data can allow lenders and underwriters to make quicker decisions.?

It can also allow the consumer to quickly find the products for which they are most likely to be approved. Instant credit risk means they can use comparison sites for loans and credit cards and receive an indication of their likelihood of acceptance before applying. This tendency contributed to the rise in a lot of the Buy Now Pay Later functionalities within the financial industry.

Subscription management

While account aggregation and PFM services are already well-known, subscription management is fairly new. This feature gives both insights and actions. Subscription management basically detects all the recurring payments from the customer and shows them in one interface.?This can be anything from a streaming service or a fitness membership to a utility bill or a monthly mortgage. From here the customer can manage the recurring payments by for instance cancelling unwanted subscriptions or getting notified about upcoming payments.

Gaining insights into various transactions can allow open banking to be used effectively for subscription management. Especially if one single interface can aggregate recurring payments from different accounts in different banks. The benefits for the bank or the financial institution can be lower customer support costs on recurring payments, better churn rates on current customers and the possibility to cross-sell financial products. Find out how Subaio’s subscription management system works here.?

Opening new accounts

Opening a new account with a bank is now much easier and faster. This is highly linked to the Know Your Customer (KYC) process. Often banks want to get as much information as possible about a customer before authorising a new account opening. This is obviously for security reasons, but also to limit the risks of fraud. Moreover, this onboarding process also can help in profiling the new customer.

Open banking allows the flow of bank data so that information such as an address, occupation, income details, name and date of birth as well as credit history all match up. Because this can be done in a matter of minutes, the experience of opening a new account is much smoother for customers – and suddenly this can also turn into a competitive necessity. Opening a new account digitally is the customer’s first interaction with the bank online, so expectations on speed and user experience will be high for some customer segments.

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