The topic of digitalisation is nothing new in the banking world. According to the Banking Association, online banking has become a favourite for the majority of bank customers, with apps playing an increasingly decisive role. Services that bring greater convenience in financial transactions are extremely popular with users. In the USA, many customers are even considering opening an account with Amazon Bank, Google or Walmart – even though these giants have no financial experience. So, are we about to bid farewell to banks as we know them?
In fact, Open Banking and digitalisation are rapidly changing the financial world for customers, businesses and banks alike. FinTechs, often inspired by the real needs or concrete challenges of their founders, bring movement into the old order and provide new digital possibilities for customers. Contrary to popular belief, however, Open Banking doesn’t exclusively open new doors for FinTechs.
This article will deal with the topic of Open Banking: what is means for banks and how banks can remain relevant and innovative in the dawning of this new era.
What Are the Changes for Banks?
The lives of many people today are becoming increasingly digitalised. Companies such as Google and Amazon are automatically reaping the benefits of this as digital bigwigs who play an integral part in their customers’ lives. They have already gained trust in the digital sphere, paving the way for new digital players that enrich the financial market with new products and services. With the enforcement of the Payment Services Directive 2 (PSD2), banks should take full advantage of these new circumstances rather than shy away from them. Innovation and collaboration with third parties should now actually be desirable for banks.
If this is not the case, there is a risk that banks will be perceived as inflexible institutions managing accounts and money in the same way as they did 30 years ago, while other players offer tangible added value. This is especially true today, when the opening up of the banking structure gives more opportunity than ever before to develop exciting, practical products. Unlike traditional banks, FinTechs often benefit from a flexible corporate culture and internal technical know-how that make it easier for them to take advantage of the opportunities afforded by Open Banking. Customers in Europe are grateful for new services, but in the end they trust their own bank more than an unknown third party. Collaboration creates a win-win situation for everyone.
How Does PSD2 Affect Banking?
In day-to-day financial business, the two biggest innovations are Payment Initiation Service Providers (PISP) and Account Information Service Providers (AISPs). If the customer has granted approval, the latter access information stored at an account-holding institution in order to analyse the data so that it can be used for additional services. When a customer places an order with a PISP to trigger a payment, the provider accesses the customer’s online banking account and initiates the desired transaction.
For this purpose, banks must make APIs available to third-party providers (TPPs). In other words, TPPs gain access to a series of functions and processes that enable access to customer data and financial transactions. Though this marks a big change for banks, there are solutions that enable a seamless transition for them. In addition, there is an ever-growing range of ideas about how financial institutions can benefit from their own API.
What Opportunities Do Banks Have Within the Framework of Open Banking?
API Banking makes it possible to have an improved offering and diversified products
The new interface presents the biggest change, but also the biggest opportunity, for banks. An API enables the exchange of data between customer, bank and other providers. The bank creates a decisive advantage for itself by not only granting this access to third parties, but also by using the API themselves. In collaboration with FinTechs, an API can serve as the starting point for the development of a variety of improved services and new products.
The products of other providers are simply integrated into your own platform. By acting as an aggregator for services, the bank increases the range of choice for your customers without any effort on your part. The changeover thus works without any intervention in the core banking system or time-consuming in-house developments. This way, banks can continue to concentrate on their core business.
Your customers will be pleased about the new products as part of their online banking, but have you thought about offering them to other customers as well? A standard for shared services, together with other banks and FinTechs, also provides the possibility to offer products on several platforms.
Your risk – reduced and regulated
Although the measures are not yet carved in stone, the prospects for data security in Open Banking look promising. Though the exchange of information between banks may lead to increased risk, BaFin says that is precisely why better measures will be taken to prevent fraud, KYC and money laundering.
Your data – analysed and optimised
Big Data and Smart Data Analytics are on everyone’s lips at the moment. In fact, banks already have a wealth of customer data at their disposal. With the help of FinTech technology, this abundance of data is evaluated and transformed into Smart Data in order to make a decisive contribution to the development of innovative services and products.
How does Open Banking Affect Clients and Their Relationship with Their Bank?
First of all, we do not expect there to be a mass flight of bank customers to third-party providers. According to World Retail Ranking, only 3% of respondents plan to entrust their financial transactions to unknown providers. It is likely that users will look for banks that simultaneously offer innovative services and protect data. In particular, customers who are neither passionate digital natives nor spend much time on their financial transactions will be more likely to access new services within the framework of their familiar banking system. Today, the majority of the customer base would ideally like a platform for all services and would welcome new services in their old, familiar environment.
Taxi apps are just one example of how to simplify services by merging them. Previously, “getting a taxi” consisted of three steps: finding a taxi, ordering a taxi and paying for a taxi. With the emergence of taxi apps such as My Taxi and Uber, all these steps can now be performed in one platform.
FinTechs and banks can also apply this principle. Let’s take the example of buying a car: as part of their banking, your customers can now search for a car, see how much money they have available to buy it and receive suitable loan proposals. When used intelligently, the customer-bank relationship can be strengthened as a result of the changes.
Open Banking Is Better Banking
Many banks have so far had fixed feelings towards the forced opening of their structures to third parties. In the meantime, however, it is becoming increasingly apparent that banks are far from fighting a losing battle. Instead, they can reap the benefits of these changes in the era of Open Banking.
Many financial institutions still assume that FinTechs will be the only ones to benefit from using customer data for new products and services. However, according to a PWC report, the single greatest opportunity for banks is also to collect and use customer data to offer suitable and innovative products. Thanks to the interface, they don’t even have to develop these products internally, but can leave the work to FinTechs and benefit fully from the result.
While existing and new financial start-ups in Germany have to apply for a BaFin license – there are similar licenses in other countries as well – banks benefit from their existing structure, certification and customer data for which they do not initially have to apply for access. Banks should view the trust they have fostered over decades as a competitive edge to establish themselves as partners for FinTechs and remain as close allies to their customers.