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Why do we might have been hearing a lot about open banking nowadays and how we could benefit from it?
The reason why you may here a lot about open banking in recent months is because it has the potential to revolutionize the way financial institutions expand customer reach while increasing existing revenue streams as well as adding new ones.
This means that financial institutions are heading to the new era where banks (and other financial institutions) could have an opportunity to better understand and serve their customers.
Open banking era could show us that there are two ways how it could be beneficial for both, financial institutions as well as end customers:
- By changing the fabric of traditional banking through offering new service and adding value/expanding the current one. This could also help banks not only to develop new revenue streams but to drive down costs by making better use of data
- By creating a revenue-sharing ecosystems, where incumbents give customers access to third party-developed services while profiting from a subscription or referral basis
However, while open banking holds great promise to the future of financial institution, there are also some risks that need to be considered. These include the potential for fraud and data breaches, as well as the need for robust security measures to protect consumers’ data.
And we will cover it all in next couple of articles but first let’s see what is open banking and how does it work.
What is open banking and how does it work?
Open banking is a term used for the increased access that 3rd party have to their financial data. This access is made possible through the use of application programming interfaces (APIs) which allow third-party developers to build applications and services around a financial institution’s core offerings and to deliver a new service to the end customers.
As we previously said, open banking has the potential to revolutionize the way we manage our finances by giving us, the end consumers, greater control over our data. As a result of this, use of new services could make our life easier while enabling us to switch banks or compare products and services easier than ever before) and by giving financial institutions opportunity to change the way how they work with their customers and partners.
The future of open banking and why banks should take the lead in creating an ecosystem?
The future of open banking is one where banks take the lead in providing access to financial data and services through APIs enabling partners and fintech companies to connect and create new added value services.
This would allow for a more open, transparent and efficient banking ecosystem, where customers are able to choose the best financial products and services for their needs – either directly from the bank or from the ecosystem.
This way of creating an ecosystem presents a unique opportunity for the banks to improve customer experience and build trust by fulfilling consumers’ needs in a more personalized and efficient way.
What are the main concerns of open banking?
One thing is for sure and that is that any future is not without its challenges.
The main concern for anyone involved in open banking is privacy and security.
Recent study showed that 48% of the consumers had negative opinions about open banking exactly due to the data and cybersecurity concerns.
From the customer perspective, danger seems to be everywhere: Malicious third-party apps could access a customer’s account, data breaches could happen, fraud, hacking, insider threats ― all are possible.
That is why financial institutions should take care of a couple of things before taking the lead if they would like to make their customers feel safe with them.
1. Following regulations
Government bodies create standards that all third-party providers (i.e. FinTechs) and banks have to follow if they want to be a part of the open banking environment. For example, accessing open banking APIs is only possible for the apps if they went through an independent audit that can prove their systems and security controls are up to the standards in place (and continue proving it regularly after)
Also, open banking regulations (such as PSD2) in combination with local and regional protection laws, – such as GDPR – should be aligned in order to create equal rules for everyone and enforce a high level of security.
2. Complete transparency at any time
One of the main concerns open banking creates is a transparency.
This means that consumers should be aware of how their data is being used, how they can control it, how it is being stored and how the company is regulated at any time.
Moreover, as the regulations are already in place financial institutions, the ecosystem as well as FinTech apps should be proactive in letting the customer know all about their data and how they have been used.
This kind of transparency gains trust among the users and makes the ecosystem a safe place to engage with.
3. The Power Of AI
Advanced transaction monitoring that understands user behavior and timely signals illegal activity such as misuse of transactions of money laundering is one of the biggest challenges that open banking should solve.
Mandatory processes that every bank has to undergo (like KYC) with every customer to identify and verify their identity initially and regularly over time is just a starting point in the safe customer journey .
With the power of AI , open banking could become a more powerful and secured place by creating an accurate picture of a typical customer and their transactions that could prevent fraud and misuse.
4. Proactive cybersecurity and cutting-edge authentication as a must
Cybersecurity space constantly evolves to become better in order to ensure that open banking ecosystem makes all necessary steps to understand threats and weak points and proactively looks for vulnerabilities.
This means that open banking needs a system that will actively monitor all the red flags and the issues before they even become obvious.
Today, cybersecurity starts from the authentication process where customers could prove who they really are so the open banking becomes more secure place but it does not end there.
Access to APIs also must be secured using specific standards, which require technical authorization, user authentication and consent management. This, in turn, requires integration with Web Single Sign-on and Identity and Access Management (IAM) that provide extra layers of security.
How banks could drive innovation with use of open banking (use cases)
Banks have indicated that they want to use open banking to drive innovation, but they are not sure how to move leadership discussions from cost saving and risk management to real innovation.
That is why we would name two use cases that banks CIOs could use to demonstrate how open banking could drive a real innovation:
- Banking as a service (BaaS): Some banks and financial institutions may want to leverage their open banking infrastructure in a BaaS model because BaaS has a simple promise: offer accounts, payments, foreign exchange or any other banking services to your clients, without becoming a fully licensed bank. This means banks would start offering the technology and capability as a service proposition to other institutions that would become part of the ecosystem.
- Developer portals: Open banking may also enable a different view on product and service distribution, either through developer portals distributing APIs, or by wider, customer-facing portals that offer similar portals with APIs designed to be consumed directly by customers. This means that bank would allow to the ecosystem to build independently their own applications on top of banks Core system using their API and various modules to solve the problems you targeted.
At its heart, open banking has the potential to make the financial system more responsive to the needs of customers by making data accessible and easy to use.
No matter if we talk about individual or ecosystem approach, open banking can help create a more competitive marketplace for financial products and services.
Open banking is the way forward, but considering all we have outlined today, it is not always easy to know how to successfully harness its power. With our long-standing experience in banking digitalization, ASEE has know how, credentials and proved products to help you start. Contact us for a free consulting meeting or a call, and let’ shape the growth together!