Open banking is transforming the financial services sector
The community-driven demand for financial data integration led to major changes in economic legislation. APIs become unalienable from the quality banking experience. Is it good or bad for traditional institutions? Let’s analyze that.
How open banking is transforming the financial services sector
Like all other spheres of human activities, financial operations become highly automated, mobile, and flexible. Using APIs also makes individual wealth management better optimized. It doesn’t require a financial consultant anymore. Third-party apps can effectively analyze one’s financial data and make reasonable suggestions.
Banking institutions are losing their status of exclusive providers in the financial sector. Businesses and developers are entering the game and sometimes even changing the rules. The sector is becoming extremely competitive. From the customer’s view, it is a great benefit. Competition fosters creativity, innovation, and better service conditions.
New standards and regulations must be applied to secure data. Contracts and partnerships are dragging traditional banks out of their comfort zone towards robust cooperation with fintech startups. Here comes the digitally-driven banking revolution.
Does it threaten the existence of traditional banks?
When dramatic changes are requested by customers globally, it surely means that the existing system is no longer efficient enough. However, it doesn’t mean it should be demolished altogether. Rather, it’s a timely alarm to keep abreast of the times.
Previously, banks operated within a closed data model. They were the sole owners of their customers’ data and had total control over it. The competition among banks was based on fees and interest rather than convenience or customization.
The era of e-commerce, mobile payments, and smart devices has changed the public notion of accessibility. They need to have control over their own accounts to be able to leverage their money 24/7. Globalization has also made people highly mobile. They travel more and need to solve their financial issues on-the-go. Fintech businesses have presented great options. However, traditional banks still remain powerful financial players.
As you know, even after most civilized societies have rejected the monarchies, its institution exists. People love stability and tradition. Yet if the banks don’t want to become purely nominal units, as royal families have, they need to embrace change and become active players in their field.
Which opportunities does open banking bring?
Challenges bring opportunities. In the given circumstances, the banks will be forced to undergo tremendous changes.
Firstly, they will need to focus on technology. Multiple digital banking channels should complement each other, be integrated and intuitive. Numerous fintech projects can become both sources of new ideas and valuable partners to traditional banks. Most of the existing solutions have similar purposes. Banks have a chance to adapt any new app or payment option to their peculiar offers. Technology itself is good, but once banks combine it with their trustworthy services, it will become truly powerful.
Secondly, open banking creates a need to enhance data security and transparency. Banks and fintech sector will be forced to come up with greater protection measures. It will move the focus from long and hardly memorable passwords to complex encryption methods. Security urges will also promote better identity verification procedures based on biometrics such as fingerprint, facial or iris scanning.
Having a myriad of financial data stored in one place will give banks a better understanding of their customers’ money management habits, financial goals, and needs. A shift to digital banking eliminates the need for omnipresent physical branches, so the banks will have the chance to serve those unbanked in remote regions. Also, financial consultants can customize their services to individual clients after thorough data analysis. If banks implement smart AI algorithms, they will quickly get the data necessary for unique financial offers.
Finally, digital banking platforms will help different sectors cooperate in a healthy mutually profitable partnership. Banks will be able to direct their clients to partner enterprises like insurance companies, real estate agencies, car dealerships, etc. Customers will apply for credits with specific purposes. Leveraging the complex open banking data will help banks suggest suitable deals according to individual financial preferences.
Furthermore, many emerging startups which provide small everyday loans to those unbanked may register those cases as credit history. Therefore, banks would be able to access one’s credit score even if a person hasn’t actually used banking services before. This will widen their client range.