Traditional banking systems are generally siloed, where most of the customers do not have access to or control of their financial data across different institutions. This lack of transparency and interoperability, respectively, has led to inefficiency, small product offerings, and a less-than-perfect customer journey. Besides, due to the flow of financial information—that is, a restriction of free financial information—the consumers may find it very hard to access tailor-fit financial products and services that works best for them.
Latest in this respect is the game-changing role of an open banking platform, resulting in the safe sharing of financial information between banks and third-party service providers through open APIs.
In so doing, open banking does away with the data silos, allowing consumers to realize the view of all relevant financial information in one place, and also the possibility to access continuing and innovative services relating to bank data from multiple providers. In doing so, it introduces competition, and thus further innovate and gives the power over the customer’s financial information.
Open banking offers promising ways to revolutionize interactions with financial services for consumers. Thus, consumers are able to securely share banking data, using APIs, with trusted third-party applications for integrating and managing their finance seamlessly. This allows them to create new, more personalized financial products and services, such as budgeting tools, investment platforms, and credit management apps.
Open banking allows consumers comprehensive and bespoke banking. It allows easy comparison and switching of financial products, better lending rates, tailored advice on financial products, and, through the value their data offers to the openness, the usage of more accurate credit scoring, tipping plans for savings, investment recommendations to their particular circumstances that will improve their overall financial wellbeing.
Open banking generally enables a lot of innovation and collaboration between many fintech companies late towards the banks and financial institutions. This will further increase the revenue streams and, in turn, engage more customers through service offerings of higher quality. Open banking also induces the traditional banks to raise their quality of user experiences and digital services due to the enhanced competition.
In other words, open banking is a vehicle of transformation in regard to the security aspect of data sharing, innovation, and provisioning of consumers with personalized, effective, clear financial services. The adoption of open banking would foster an inclusive customer-driven ecosystem for all players in the financial sector.
The challenges the UK banking industry faces today are manifold, with brittle economic growth and miserably low interest rates squeezing profit margins. At the same time, new technologies raise customer expectations while reducing entry barriers for new competitors. In turn, regulators are introducing a raft of new initiatives to reshape the landscape in which banks compete, one of which is open banking.
What Are Open Banking?
Open banking is a regulatory framework that brings in more competition and innovativeness related to financial services. The main driver of open banking argues about the European Union’s revised Payment Services Directive, PSD2. The PSD2 requirement for banks to open access to customer payment accounts to nonbank competitors basically democratises financial data.
In the UK, the Competition and Markets Authority has gone a step ahead and directed the country’s leading banks to come to a consensus on shared requirements through which the customers’ transaction information can be accessed. Account options now become comparable on like-for-like terms, and the customers thus have the ability to anonymously shop for better banking deals.
The Effect of Open Banking on Customers
Open banking benefits customers indirectly but through two main channels- through the improved level of transparency and choice. Open banking helps develop freshly designed, more fit-for-purpose financial products, apps, and services by making customer transaction data more available..
Open banking further enables the rise of platforms through which customers can access the best deals on offer regarding financial services or products from across various suppliers—including traditional banks, challenger banks, and any other fintech. This kind of competition may bring forth the best sorts of deals and higher standards of financial solutions for the consumer.
Challenges and Opportunities for Traditional Banks
While it is creating room for new entrants, at the same time open banking is promoting the friction. Core competitive advantages of the traditional banks—the ownership of relationships—could be eroded by new providers of the banking application that can pop up by availing of the open banking framework associated with the aggregate services. Such providers could gain significant attraction with the customers and garner them away from their primary banks.
However, at the same time, incumbent banks have opportunities to retain the customers. They can use their dominance of brand recognition combined with a large customer base and provide aggregator service by themselves, hence retaining customer relationships, but even enhancing them by providing comprehensive financial management tools.
The Role of Technology in Open Banking
Customer experience will be greatly underscored—if this is the right word to use—with groundbreaking changes in the provisioning of financial products tailored to customers’ needs.
Also, the case of open banking is that of a collaboration of banks with Fintech. Indeed, through collaborations with Fintech, banks will be capable of introducing advanced technology in their service packages to enhance services toward clients and customers. Collaborative business models like marketplace banking will spur innovation, whereby customers experience one-stop access to all kinds of financial services from different providers.
Support from Regulators and Market Forcing
Open banking, most importantly, requires respective regulatory support and market dynamics. In view of this, regulators have a highly critical role in ensuring that the open banking ecosystem is adequately secure and fairly functions. They have the responsibility to set up and enforce standards of data sharing, privacy, and security in order to ensure protection and confidence among customers.
If banks want to retain their relevance in this changing dynamic, they must adopt open banking by playing to their strengths.
Open banking is transforming the banking industry in the UK, bringing about an increase in competition, innovation, and consumer choice. Besides the threats this poses to incumbent banks, it provides numerous opportunities for the innovative and change-inclined amongst them. Through the use of the inherent advantages of incumbents and new technologies, incumbent banks can succeed in an open banking world.
Deloitte invites you to discover more about the effects of this legislation and others for open banking and how the banks and others might best respond over at Deloitte.co.uk/futurebank or join the conversation on social media using #FutureBank.
