According to Accenture Research, 77% of banks intend to invest in “open banking” initiatives by 2019. Open banking is a concept that allows banks to share customer data with third-party companies or apps securely and in real time, through the use of open application programming interface platforms (APIs). An API is a set of published, well-documented “rules” to a given piece of software that provides developers the building blocks of that software, allowing anyone with development expertise to use, rearrange and build new apps and products.
However, open banking should not be limited to just data sharing. Instead it should serve as the catalyst for a new wave of financial innovation, a re-imagining of traditional digital architecture unrestricted by legacy technologies. Here’s what open banking could mean for your bank or credit union.
1. To launch digital products, open banking technology is quicker to market and more cost-effective.
Legacy banking tech is not known for its ease and affordability. It’s known for being a slow and painful process. It’s not necessarily the fault of legacy tech either. These platforms were developed 30, 40, even 50 years ago. The systems have been adapted to accommodate an enormous range of functionality, sending the cost to maintain a full-service, feature-rich system through the roof.
Open banking represents the emergence of new technologies that can provide modular functionality with à la carte pricing, without fully transplanting the core data processing platform. Because the tech runs through open APIs, banking providers can use only what they need for a given product or project. This significantly decreases design and development cycles and increases the speed to market, allowing for more frequent iterations in the quest to perfect the user experience — all of this while delivering the scale and cost benefits of the cloud to banks that use them.
2. Open banking won’t disrupt a bank’s digital channels or their technology stack.
Open banking technology is designed to be flexible and modular — specifically so it can be used piece-by-piece alongside existing infrastructure. It’s not meant to replace core processors as much as it is to live next to them. Banking providers can surgically implement only the technology they need, while removing potentially extraneous costs associated with unnecessary products.
Many banks and credit unions want to innovate and deliver new products, but they can’t disrupt their existing infrastructure along the way. So few end up actually innovating. Open banking, with its API-based approach, aims to eliminate those obstacles, providing a secondary, more modern technology stack that allows banks to design, develop, test and deploy new digital products separate from their existing online or mobile banking platforms. This enables smaller financial institutions — particularly community banks and credit unions — to catch up with the industry’s biggest players, allowing them to offer advanced functionality and compelling user experiences that adapt quickly to changing demands and expectations.
3. Open banking technology helps banks partner more easily with fintechs.
Whether or not your organization has partnered with a fintech company, you are likely familiar with the time and cost required to integrate any new technology into your existing legacy system(s). With open APIs, however, open banking technology is written to be shared in a language that developers anywhere can understand, making it easier than ever for financial institutions to connect with third parties or have other vendors connect with them on the institution’s behalf. An environment that optimizes third-party integration gives banking providers a new level of freedom when choosing whom they partner with and what features they bring to digital channels.
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4. Open banking can provide new opportunities to expand or evolve a bank’s business model.
The traditional banking model was built on geography. Local banks were the heart of their community, and their geo-specific knowledge and expertise was the primary draw for most account holders. The first major wave of digital banking technology — big, full-service core processors and everything built on top of them — was similarly designed around this model.
But as account holders continue to unleash themselves from brick-and-mortar banking — and as machine learning continues to replace community expertise — banks and credit unions must evolve their business model beyond what they’ve been doing for the last century. Conveniently, open banking provides the foundation to do just that. A bank, for example, could use open APIs to build a Millennial-focused banking app that account holders throughout the country could adopt.
Bottom Line: Community banks and credit unions have always been cornerstones in the communities they serve. Embracing open banking allows them to reinforce that position and expand their footprints to new markets — both geographically and demographically.
That’s just the beginning. If open technology allowed financial institutions to reimagine the way basic functions like bill pay are executed — turning it from a cost center into a revenue source — the banking industry would see monumental changes.
While it’s impossible to predict the entirety of innovations that open banking will catalyze, it’s safe to assume that new banking technologies will completely transform everything from onboarding and cross-selling to savings and lending products.
Chris Petersen is the Chief Revenue Officer at Q2 Holdings. With more than 30 years of experience in financial services, she is focused on helping community financial institutions identify new ways to connect with their communities, drive revenue, engage with customers at all levels and create new strategic growth opportunities.