The financial services landscape has been disrupted right in front of our eyes. While there’s a lot of benefits of open banking for customers and for banks, we’re taking a look at the most important ones.
In the digital age, financial services have to be characterized by 3 words: quick, easy, and seamless. Standing in lines to talk to the bank teller is a thing of the past. Modern consumers want to take care of their finances through their smartphones and banks want to win their loyalty. The common ground? Finding new ways of operating via new technologies. Open banking provides a unique opportunity for both customers and financial companies to transform how people and businesses manage their money. It’s a way to revolutionize the finance industry. Below we’re going to analyze the advantages and disadvantages of open banking.
What is Open Banking?
Open banking is a practice enabled by a series of technologies, regulations and services that aim to transform the financial industry. To do so, specialists from the IT world create new banking services and ways to interact with them, new banking models, and commerce capabilities. Open banking allows third parties to access the banks’ data through the use of application programming interfaces (APIs). The third-party providers (TPPs) represent a variety of possibilities, from microloans to easy payment gateways and e-wallets. Depending on the service, banks and businesses alike can be considered a TPP.
Banks in the era of open banking are no longer traditional institutions with locks and keys. With the customer-centric approach as the main objective of providing financial services, banks are becoming one of the two things: bank as a service and bank as a platform. Customers are in control of their data which gives them the opportunity to take advantage of multiple financial services that their bank of origin didn’t have initially. Private customers and business can manage their finances more efficiently which one of the main benefits of open banking.
Additionally, open banking functions as a fuel innovation in the fintech industry, allowing new technologies to grow and re-shape how we think of money.
Advantages of open banking for customers
The biggest advantage of open banking for customers is that it allows them to no longer consider visiting the bank as an indispensable part of their life. Open banking means that the bank isn’t necessary for the customer journey – the bank is mainly a service, not an institution. The need to “see the bank in person” has been especially inconvenient in the wake of Covid-19. Customers not only prefer to deal with their finances online – staying home is essential for their health. The global pandemic has been a driving force behind the digital transformation and one more factor for open banking to become the standard.
What is more, open banking has provided brand new services for the customers. Sending and receiving direct deposits has never been easier as it is with Paypal. A cash or debit card isn’t the only option for payment – the Apple account works the same. Buying with a credit card can be replaced with easy installment payments provided by Klarna. To use these services, the customer doesn’t even have to log into their bank account.
Another benefit of open banking is that managing finances using planners and services outside of the bank is a lot easier. The customer doesn’t have to jump through hoops to gather all the necessary information from their bank: they simply agree for the service provider to access their data through the bank’s API. This speeds up the processes that have the reputation of being head-ache inducing, like applying for a mortgage.
All in all, banks in the era of open banking have to be more competitive in order to win customers. This results in a wider choice of options, better customer service, and improved quality of financial services.
What are the risks of open banking for customers?
As it is with every type of new technology that relies on data, there is a worry about security. However, open banking requires the maximum level of security. Using services provided by TPPs calls for multi-factor authentication. The customer has to prove their identity through at least two sources, e.g. a password and a code sent via a text message. They’re also protected by the security services encrypted in the banks’ infrastructure. With how fast the fintech market has been growing, it’s safe to assume that security will only increase.
Benefits of open banking for banks and fintech providers
Open banking levels the playing field between banks and fintech businesses. Some things will never be the same as online banking becomes more and more popular. However, the new possibilities so far seem to outweigh the negatives.
Some of the major benefits are the following:
- Potential for collaboration
Banks and fintech can co-exist: open banking doesn’t mean that one has an advantage over the other. Quite the opposite: open banking makes collaboration between traditional financial institutions and fintech disruptors almost seamless. Data-sharing agreements with fintech and other non-financial companies open up the potential to develop new, innovative services.
- New financial business models
Thanks to open banking, banks become more futuristic. Adapting new forms of technologies transforms the customer experience completely. Customer can access their account and data through mobile devices. In the future, technologies such as voice assistants and elements of augmented reality will be incorporated into the interfaces of banking institutions. Banks can develop these services on their own or use fintech providers to enrich the customer journey. There’s almost no need for physical locations – full online banking is now possible.
- The customer-centric approach in bloom
Open banking opportunities make banking offers more appealing to customers. There are as many needs as there are customers and open banking allows to fulfill them all. With growing competition in the banking sector, it’s important to create holistic products and platforms.
If banks and fintech companies go hand in hand, the digital transformation of the financial sector will go smoothly and bring benefits to every party involved.
5 benefits of Open Banking
The paragraphs above show some of the benefits of open banking. If we want to sum up the positive sides in a shortlist, it would be like this:
- Better accessibility to financial operations
Access to technology is the only requirement to perform financial operations. Customers who live in remote areas or who are unable to access banking facilities due to a variety of reasons can still take advantage of tailored banking services.
- Centralization of services
Financial advice, loans, transfers, and money management can be centralized when a traditional bank takes a turn towards the bank-as-a-platform.
- Financial services work in real-time
Finalizing a deposit or opening up an account takes minutes. The time spent on other operations is greatly reduced as well.
- Reduced costs of financial operations
Even small firms can take advantage of new technologies to streamline costs.
- Brand new products and services
With cooperation between banks and fintech companies, the possibilities are limited only by the existing technology.
Are there any disadvantages of online banking?
Like most things in life, open banking comes with pros and cons. The two major drawbacks of open banking are:
- Distrust of customers
In general, customers are reluctant to share their data. They are bombarded with news about how it can be used against them, so every new software that asks them to do this is met with a certain uneasiness. It’s also worth noting that most customers do not have extensive knowledge about IT: the lack of knowledge is a major barrier to fully develop financial products and services – after all, they’re only relevant when customers want to use them.
- Depersonalization of customer journey
It’s almost impossible to build an interpersonal relationship with the customer in the era of open banking. The face-to-face encounters between the customer and the bank used to be the cornerstone of good customer service. Although some might think it’s a thing of the past, interaction with people is the basis of a positive mindset for every human being. Decreasing the chances of meeting another human is a blessing to some, but a very grim reality to others.
In order to overcome the disadvantages of open banking, banks and fintech have to put effort into educating their customers. Not everything can be done by machines and software; a bit of human touch can go a long way.
Conclusion
Traditional banking has to face the new reality where banks aren’t the only players on the market. Those that try to adapt to new technologies will have more success in the long run. It’s safe to say that open banking is inevitable. The current ecosystem is going to turn into a series of digital tools. Banks have to draw a new vision and decide where they fit in the new financial model. The evolution of fintech is going to be a spectacular thing to witness as long as the good of the customers comes in the first place. Even though there’s an understandable level of distrust towards changes, customers are the ones who will gain the most out of open banking. Lucky us!
Learn more about Fintech and mobile banking from our related articles:
March 22, 2021
