Open banking is an initiative that allows third-party financial services companies to access users’ banking data through the use of APIs. The primary goal of open banking is to put power back into the hands of customers, enabling them to securely use third-party financial products and services that rely on banking data or functionality.
With the introduction of new regulations like the European Union’s Second Directive on Payment Services (PSD2), many banks have no choice but to open up, giving others access to their users’ data for not much in return… or so it may seem! In reality, there are plenty of strong reasons for banks to embrace open banking, with concrete financial incentives. Let’s look at six of them.
Of course, the main reason banks are implementing open banking practices is compliance — or at least preparation for compliance. While the European Union’s PSD2 is the best example of a sweeping regulation that requires banks to share customer data with third parties (this is known as X2SA — Access to Account), it’s not the only one. For example, Hong Kong has its Open API Framework, while Australia has the Consumer Data Right (CDR) act. Other significant jurisdictions are moving in the same direction: the US Treasury has recommended the introduction of financial data sharing regulations, despite the country’s hitherto market-driven approach.
How it affects the bottom line: Of course, compliance isn’t about driving additional revenue: it’s about staying in business. With that said, one could say that compliance improves profitability by avoiding unnecessary fines and fees!
2. Improved Digital Agility
A major challenge of open banking is being able to share data securely, quickly, and efficiently. As a result, many banks are having to redesign their entire data architectures, often employing an API-based microservices approach to make data more accessible. Greater digital agility, then, is both a necessity and benefit of open banking.
In turn, improved digital agility has its benefits. Not only does open banking improve security and transparency, but it also makes it easier for banks to leverage their own data internally — e.g. for service personalization or to create frontend applications — where it may have been impractical, or even impossible, to do so previously.
How it affects the bottom line: An improved digital infrastructure enables data to be better used internally to improve the customer experience, thereby increasing customer lifetime value.
3. Premium API Products
One particularly exciting benefit of open banking is the potential to create new, revenue-generating API products with relative ease. For an example, look no further than Nordea: they’ve used the open banking shift as a springboard from which to create paid banking APIs for their corporate customers. Offering API-driven payments, instant reporting, and various foreign exchange tools, these “Premium” APIs go well beyond compliance, building on the hard work that was involved in opening up their systems for open banking.
How it affects the bottom line: By developing and selling access to new API products, banks are able to create additional direct revenue streams. These premium APIs can also be used as up-sells or cross-sells for other banking products (such as certain corporate accounts).
4. Increased Customer Satisfaction
Open banking gives customers huge amounts of freedom as to the number and scope of financial services available to them. On the one hand, this appears to be a clear negative for banks, as it allows third-party organizations to capitalize on user data, where previously only they could. However, a greater selection of financial service integrations — whether or not they are the bank’s own — ultimately improves the customer’s banking experience, making them less likely to seek alternatives. As they say, a rising tide lifts all boats!
How it affects the bottom line: Since the customer is more satisfied with their banking experience, they are less likely to look for alternatives. This increases customer lifetime value, improving long-term profitability in a predictable way.
5. Potential for Collaboration
As mentioned earlier, open banking is designed to make it possible for third-party financial services companies to gain access to customer data. If banks are willing to take this a step further, they can actively assist these third-party companies in doing so for a whole host of benefits. For example, banks can offer additional functionality, dedicated support, or even developmental collaboration to chosen third parties. In exchange, these third parties can return the favor with various non-monetary offerings, such as additional product functionality for the bank in question or cross-branding.
How it affects the bottom line: By building collaborative relationships with third-party financial services companies, banks are able to create unique value propositions and employ creative marketing strategies, thereby winning new customers.
6. Wider Client Base
Until now, we’ve focused on the benefits of sharing data with others. However, it’s important to recognize that open banking is a two-way street: in other words, it could allow banks to gain access to user data from other participating financial institutions (especially other banks). This creates a massive opportunity for banks to create their own integration-based financial products and services.
“Banks able to move fast to develop a modular business and technical architecture can leverage their brands to dominate parts of the value chain – whether front, middle or back, while dynamically integrating offerings and data from other players.” – PWC
How it affects the bottom line: Whereas banks could previously only offer additional financial products and services contingent on banking data to their own customers, they can now serve customers of other banks, with the potential for significantly more revenue.
It may be compliance that has pushed banks to invest in open banking, but there’s no doubt that the movement has numerous other benefits with tangible financial impacts. Many of these benefits, such as direct improvements to customer satisfaction and digital agility, resulting in increased customer lifetime value. However, open banking also improves security, opens new doors for collaboration, and allows banks to make bigger plays with additional financial products and services of their own.