Meeting digital demands in a constantly evolving market is imperative to businesses, especially for financial institutions. To keep up with the times, many banks have begun prioritizing digital banking innovation to improve their services, and as the pandemic drastically changed how people interact, customer reliance on online banking platforms and secure digital transactions has never been more urgent. Today, financial institutions must prepare for open banking and fully improve their digital infrastructures.
Open banking is an initiative that enables third-party financial service providers to gain open access to customers’ financial data through the use of Application Programming Interfaces (API). These third-party financial service providers include non-bank Financial Technology (FinTech) companies, which are a driving force in the proliferation of API. The development of API paves the way for the use of open industry-approved tools that financial institutions can customize and test to improve their banking services.
Open banking’s main goal is to provide customers with the flexibility and convenience to use third-party financial services that require access to banking data for processing. As a result, financial institutions, third-party providers, and customers will be able to access a secure network of accounts. Ultimately, open banking provides customers with more avenues to use their financial data while making their transactions safer.
To further understand the urgency of preparing for open banking, here are reasons that should compel more banks to adopt this change:
Compliance to Improve Transparency and Security
Banks and other financial institutions are encouraged to implement open banking practices to prepare for compliance. Compliance initiatives are seen to boost innovation, competition, and transparency across payment industries.
Several countries have since developed bank data consumer protection regulations. For instance, Australia introduced the Consumer Data Right act as early as 2017, while Hong Kong released implementation plans for its Open API Framework in 2021. Another prime example of a broad regulation is the European Union’s Second Directive on Payment Services (PSD2) mandate in 2018 that required banks to share customer data with third-party financial service providers .
Though not all countries have implemented similar banking compliance laws, financial institutions all over the world should anticipate this coming change. As consumers demand greater access and control over their financial data, more banks are obliged to prepare for compliance. And beyond the requirement, financial companies are encouraged to think of open banking as a shift that will ultimately improve their services and make customers more confident about trusting their bank.
Satisfy Changing Customer Demands
Banks should take advantage of open banking to strengthen their relationship with their customers. One way to do this is by using existing customer data to tailor API services across an entire range of spending activities. Some of these activities include shopping and travel habits. And as banks implement open banking and continue to work with APIs, customers will enjoy greater freedom to use a variety of financial services that are available on the market. This makes transactions easier and faster, with some services even delivered in real-time.
For instance, Spanish Bank BBVA is one of the earliest banks to use API technology in collaboration with a FinTech company. Through API, BBVA can provide real-time payments even on weekends to their customers. This puts BBVA ahead of other banks that make customers wait for two days before their transactions are cleared. As such, more customers prefer immediate payment transfers rather than transactions with longer waiting times. Furthermore, open banking will provide the following customer benefits:
- Allows customers to view all their bank accounts in a single banking app.
- Provides an easy way to compare different banking products for specific financial needs.
- Offers customers a convenient way to manage their funds and avoid overdrafts.
The further your bank implements innovative digital services, the more satisfied your customers are likely to be. Open banking will not only encourage your customers to keep using your services, but it also attracts more people to start using your banking platforms, organically increasing your customer base.
Build Collaborative Relationships That Boost Your Services
In a growing API economy, banks are expected to enable customers to use third-party payment systems for different transactions. These third-party service providers, such as FinTech companies, are the ones that can develop digital interfaces for the bank’s customers. As such, banks are encouraged to seize opportunities to collaborate with these FinTech companies.
Banks can take it a step further by offering dedicated support and full cooperation with third-party providers. In exchange, third-party providers can offer additional functionality to support the bank’s digital services. Through close collaboration, banks can develop new sources of revenue by creating digital services that were previously not possible without API support.
Indeed, investing in open banking provides numerous benefits to financial institutions. Besides allowing your bank to comply with consumer protection data regulations, it enhances your digital infrastructure. Open banking enables you to provide faster and more convenient services by working with third-party providers that use API. This way, your bank can develop more valuable services that can better cater to your customers’ needs. As a result, your customer will feel more inclined to keep their accounts current with your bank.