Open banking is changing how financial institutions and third-party providers deliver banking services to customers of traditional banks. Open banking not only gives banking customers more transparency, and thus more control, over their finances, but it also offers a more convenient option than traditional banking services.
The open banking revolution is driven by mobile technology and banking APIs. Without open banking APIs, third-party providers wouldn’t have access to the financial data necessary to develop new financial products and services.
Open banking is rapidly changing how consumers and businesses view and interact with banking services. This post will explain open banking and how banking APIs are vital to the success of these innovative digital services.
What Is Open Banking?
Open banking refers to financial institutions allowing third parties to access their application programming interfaces (APIs) to share financial data and services. As a result, open banking enables third-party developed services to offer consumers greater transparency and financial service options.
Open banking is poised to transform financial services and shake up the banking industry for consumers and incumbent institutions in positive ways.
While the thought of open banking data might scare some consumers, customer banking data is not made freely available to FinTech companies and other third parties. Instead, customers must explicitly request that their banking data be shared with third parties.
Open banking provides the technical infrastructure to make this innovative consent-driven sharing possible.
Open Banking and Banking as a Service: Are They Different?
If you have heard the term banking as a service, you might wonder if it differs from open banking. Banking as a service falls under the broad umbrella of open banking. The main difference between open banking and BaaS is how each concept uses open banking APIs.
BaaS uses APIs to access banking services, while open banking uses APIs to access banking data and other information tied to the consumer. Often, banking data and services are used together, which blurs the lines between open banking and BaaS.
The Benefits of Open Banking
Open banking has several different benefits depending on your perspective. From a consumer perspective, open banking gives them more transparency and control over their bank account information without requiring a visit to a local bank branch.
In addition, open banking offers consumers new and innovative banking services. From a banking perspective, open banking creates more opportunities for new partnerships, allowing incumbent banks to reach new consumers in more places.
What are the benefits of open banking from a business perspective? While recent open banking regulation has benefits for consumers and bankers, perhaps the biggest winners are organizations. The business benefits of open banking include the following:
- Create better product offerings for customers
- Automate and streamline financial processes
- Creates new sources of financing
- Improved customer experience
Create Better Product Offerings for Customers
Organizations with consumer consent to access information from bank accounts and other financial services can deliver more innovative and personalized services and products.
Better products and services are the most effective way businesses can improve customer experience and drive customer loyalty. In addition, open banking enables organizations to pivot quickly and respond to new financial innovations.
For example, services like Apple Pay have gotten popular with consumers. Open banking APIs make it easy for businesses to respond to consumer demand and offer Apple Pay and other digital wallet payment options.
Automate and Streamline Financial Processes
Most organizations have multiple accounts and are required to meet compliance requirements. Open banking enables businesses to streamline and automate their financial processes.
Critical financial processes such as accounting and compliance can take up valuable time. Furthermore, errors in these financial processes can lead to fines, other regulatory penalties, and a lot of extra time and effort to fix them.
Open banking helps businesses entrust the bulk of their financial processes to expert third-party providers and automated tools so that they can focus on key competencies and growing the business.
Creates New Sources of Financing
With interest rates rising, securing loans might be more difficult for organizations, especially small to medium-sized businesses. Open banking makes it easier for businesses to access the credit lines they require to grow.
Not only does open banking offer new sources of financing, but open banking services simplify credit reporting while making it far more accurate, which can help immensely when seeking traditional loans from incumbent financial institutions.
In addition, open banking streamlines loan eligibility screening. No longer do businesses have to manually submit documents for review. Instead, thanks to open banking, financial statements and other documents can be automatically uploaded and reviewed, so loans can be approved faster and businesses can access the credit they need for operations.
Improved Customer Experience
More access to financial data enables businesses to better understand their customers’ needs, and as a result, they can offer more relevant products and services. The net result is that organizations can offer their customers a better customer experience.
Many organizations fail to adequately consider the customer experience they are providing. Even small improvements to checkout processes or the digital services offered can significantly impact the customer experience.
For example, open banking can be used to streamline mobile payments by enabling customers to pay with biometric verification or even a passcode instead of entering card details and billing information.
This one change, while it may seem minor, can significantly improve a customer’s experience with your brand and not only increase customer loyalty but also improve conversion rates.
Open banking is an exciting innovation for everyone, from banks and businesses to average bank customers. The open banking revolution will create revenue-sharing ecosystems for financial institutions and businesses that have the foresight to forge new partnerships.
Consumers are embracing simple, digital payments like Apple Pay and digital wallets. Ensure that your business is not left behind by failing to embrace the capabilities of open banking. If you want to learn more about how your business can effectively utilize open banking APIs, contact an experienced FinTech development partner like Koombea.