5 Things You SHOULD Know About Open Banking Models

If you regularly deal with banks and other financial institutions, you have probably heard of “open banking” by now. But what does the term mean? Does it mean banks that have their doors open 24×7? Or does it mean banks that accept all customers? Or something else altogether? In this blog, we dive deeper into the future of the banking world to understand open banking, its benefits, and how to get started.

 

What is Open Banking?

Open banking is also popularly known as “Open Bank Data.” It is a business model adopted by innovative financial institutions in the banking industry. The open banking model lets financial institutions like banks and credit unions share essential consumer, banking, financial, and other transaction data with non-banking financial institutions using Application Programming Interfaces (APIs). Open banking models allow stakeholders like consumers, other financial institutions, and third-party service providers to access relevant financial data quickly.

Let’s understand this with an example.

A bank (financial institution) usually has a lot of data on its customers. With open banking models, banks have the flexibility to share the following customer data:

  • Transaction information,
  • Account information,
  • Credit Score,
  • Age, Income, Location, etc.

Now, this begs the question. Do customers have a say in what data they are willing to share? The answer is absolutely YES! 

Even if a bank adopts the open banking APIs, it needs authorization and explicit consent from individual customers before it shares such critical financial data.

 

What are the Benefits of Such Banking Models?

“What is in it for me? Why should I share my customers’ critical banking data with others?” 

Such questions naturally arise in the minds of banking executives when they first learn about the open banking systems. So, why should banks go the extra mile to adopt such systems? Here are the top 5 benefits of adopting open banking:

Access to Innovative Products and Services

Inefficient legacy systems often bog down old-school institutions that offer financial services, and they avoid developing new faster systems from scratch because it is time-consuming and costly. With open banking models, they partner up with tech-savvy partners to access innovative payment solutions like SMS payments, Email invoicing, IVR payments, recurring billing, etc. The best payment processors also offer seamless virtual terminals to help the banks offer both online ACH and credit card processing on one platform. Instead of spending millions of dollars on new product development, traditional banks get started with minimal upfront investment within a few weeks. 

Increased Operational Efficiency with Real-time Data Distribution

The increased use of mobile technology has helped customers with thousands of choices for convenient payment processing. Now your customers can open a savings account with another bank on their phone within a few minutes using KYC practices. Offering them the latest technology is no longer a luxury but an imminent need for most legacy financial institutions. Adopting open banking systems helps the bank’s finance and IT teams share pertinent customer data with complementary service providers in real-time. 

More Efficient Customer Engagement Practices

Open banking systems also facilitate healthy customer engagement and service practices. With these systems banks share their customer account information with third-party service providers and let them handle the customized dashboard creation processes for the consumer. 

Customized and Relevant Product Offerings

Technically advanced third-party vendors usually have analytical tools that help them analyze a customer’s requirements preemptively. They only need vital customer data to predict these needs effectively. Banks adopt controlled data-sharing practices that help third-party vendors identify and customize relevant products for each customer with open banking models.   

Faster Marketing for Relevant Product and Services

The third-party vendors that analyze this data, partner with companies that offer online marketing and retargeting services. With this information, these marketing companies run highly focused campaigns on the existing customers of a bank to cross-sell and upsell relevant products.  

 

How Will Open Banking Affect Your Organization?

Open banking systems have different implications on a financial institution based on its size. The proper implementation of such systems helps the different organizations in the following ways:

Small Bank (Less than a 100 employees)

  • Deliver time-sensitive financial information accurately for the end-consumer and internal banking processes
  • Identify cross-sell and upsell opportunities for different products and services
  • Integrate account information and transaction data with back-end accounting software like QuickBooks
  • Generate reports for forecasting growth

Medium Bank (100-2000 employees)

  • Improve reporting and cashflow analysis
  • Increase operational efficiency
  • Obtain more profound insights into multi-account management for large commercial clients

Large Bank (2000+ employees)

  • Identify risks and opportunities ahead of time
  • Integrate with multiple complementary ERP solutions
  • Improve liquidity management
  • Get enhanced insights into bottom-line revenue and profits

 

How Can You Get Started with Such New Banking Models?

The financial institutions that adopt open banking and the latest technology payment services can create a solid moat around their business practices. Such services help them stay miles ahead of their competition and increase payment acceptance significantly. But where to start? This brief guide explains how:

  • Step 1: Identify strategic use cases and define clear goals. Having pre-defined end goals helps you track your progress and calculate the ROI. 
  • Step 2: Understand and choose one API platform correctly to meet all your needs. Evaluate the risks associated with data leakage and partner with the right third-party vendors for your individual needs. At this stage, you also want to negotiate data access agreements and identify the top few platforms that will benefit from such partnerships.
  • Step 3: Provide API access to your partners while establishing robust control over data flow. Have a well-defined list of rules and regulations to manage new partnerships.
  • Step 4: Establish a solid central integration team to look after the project and report the latest findings. 

 

Risks Associated with Open Banking 

“How do I know my customers’ data is safe and won’t be misused or leaked when I adopt the open banking system?” 

This is one of the most common questions bank executives ask before adopting the open banking system. Although the fundamentals are strong, open banking is still classified as an emergent technology in most cases. Refer to this blog to learn more about the measures taken by Consumer Financial Protection Bureau (CFPB) to address the security concerns on open banking models.

Open banking does pose risks associated with data breaches and hacks. However, with solid security and compliance measures, banks can almost entirely avoid the possibility of data breaches. Ideally, a financial institution should adopt the proper payment methods and merchant services. They should also partner with reliable payment processors while establishing ethical data-sharing and compliance practices. Banks can further minimize risk by giving access control of APIs to only a handful of people who need it to do their jobs. 

 

Open banking systems have the power to transform the way major financial institutions conduct their business. Most banks have the ability to offer their commercial clients additional advanced products and services with the right partnerships on an open banking platform. If you haven’t considered adopting such systems yet, this might be an excellent time to become an early adopter and get a good head start. However, before jumping in, conduct a cost-benefit analysis and speak to industry veterans to understand the risks. Download our catalog and learn more about advanced payment processing solutions for various industries today.

By ICG Digital
May 20, 2022
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