Open Banking: A Disruptive Threat? Or Competitive Opportunity?

To innovate and stay competitive in the digital age, banking providers simply must partner with fintechs and other third-party outsiders. This means tearing down the walls that financial institutions have traditionally used to guard customer data. Here's how the balance of power in the financial industry will shift as open banking approaches, redefining the very nature of relationships between banking providers, their customers and their partners.

As new regulations create opportunities for businesses and developers to compete in the financial services sector, open banking is going to alter the way banks do business. Clearly open banking will transform the global banking market, from new platforms like IBM’s open banking software to Australia beginning to introduce open banking regulations in July of this year under rules built on the standards of Europe’s PSD2.

For some reluctant banking executives in Europe, open banking has been seen as a regulation that will negatively impact the industry. In reality it’s an opportunity for banks to evolve digitally. Open banking regulations are driving banks to technology that’s providing them with the means to collaborate with the right fintech partners, to help them excel in today’s digitally-driven word. With new technology, banks will be able to better access and mine the data they already own to create individualized services their customers want, but presently often turn to non-traditional financial institutions for, like financial service apps and online portals.

Ultimately, open banking will hasten the financial data revolution, and this will benefit banks, in the long run.

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Changes to the Current Banking Structure

Currently banks have total control over all the consumer information they collect. This gives them the opportunity to own the market by becoming the only source for traditional services. It’s within this structure that banks have been able to thwart some competitors and retained control over consumer information.

The closed model that the banking industry has usually operated under will be drastically impacted under open banking regulations. Opening up the market and allowing data to be easily and securely accessed by third-party providers means that banks will no longer be the only institutions that have access to the broader view of their consumers. Primarily transferred through application programing interfaces (APIs), data sharing gives consumers access to their own banking data in real-time to change the way they make transactions, invest and save.

Being able to compare prices from different providers will allow consumers to truly own their data and choose to do business with institutions they trust. In this highly competitive market, banks will be challenged to develop more innovative solutions. To succeed, they’ll need to show how customer-centric their systems truly can be, which begins with overcoming and mastering new data sharing realities.

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Banks Will Need to Protect Consumers

Even though application programming interfaces (APIs) have been around for years and have succeeded in other industries, banks must overcome the lack of security regulations in place to ensure customer data is protected from phony third-party organizations.

In an industry where data sharing has always been on a risk and permission basis, there will need to be a shift in the security landscape in order for open banking to be successful. As more competitors enter the market, banks will need to have a system to protect consumers from phony transactions. Using encrypted and aggregated data will enable banks to create a robust system. By thoroughly vetting potential API partners, banks can ensure their consumers aren’t subject to unwanted advertising or predatory lending.

Although the inherit risks of data sharing do exist, it’s critical for banks to know that by developing these processes and governance, they can overcome the challenges. When done correctly, banks can deliver increased security through enhanced know-your-customer capabilities and create deeper relationships.

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What Advantages Will Open Banking Bring?

Ultimately, open banking is simply a framework that helps banks on their digital journey. As more technologically focused competitors enter the market, banks will need to understand the importance of their digital channel. Integrating digital solutions with legacy systems is a time-consuming challenge, forcing banks to compromise on other customer-centric strategies.

Open banking will cause consumers to demand extremely personalized services. Incorporating digital platforms will allow banks to offer advanced features, such as a product catalog that includes dynamic, flexible and event-driven pricing capabilities. Through these features and more, banks can utilize data to differentiate themselves from the competition.

Specifically, banks can take their services even further to offer financial and non-financial products. For example, rather than simply offering an auto loan, banks could offer the entire value chain to help customers buy a car at the lowest price. It’s through APIs and their ability to connect customers’ current financial data with the offerings of a car dealership that banks can form partnerships to drive purchases outside of their typical scope.

Additionally, life events have always been a valuable way to understand the greatest impact on a customer, but banks haven’t been able to leverage that in the past. Harnessing the power of digital platforms will allow banks to link this raw customer data to personalized events to drive loyalty. This will take banks away from a fragmented view of their customers to translating multiple customer experiences into one single action. With hyper-personalized analytic driven platforms, banks can more successfully navigate their customers’ data like never before.

Looking Ahead for Open Banking’s Influence on U.S. Finance

How open banking evolves in each nation will vary. In the U.S., the market appears to be where this evolution will come from, rather than a regulatory or legislative push.

But nearly everywhere banks are facing an unprecedented level of change, from consumers demanding improved and personalized experiences to increased competition. Would-be survivors need to focus on their digital strategy.

Banks that embrace open banking from the start will set themselves apart and show their value early on. Those that choose not to, or to evolve later, will be faced with an additional challenge in itself — third-party players and fintech companies that will lure away their customers with innovative solutions.

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