Role of Open Banking in Fostering Fintech Innovation
by Abin Thomas, on Jul 27, 2020 1:01:26 PM
Open banking has become an ubiquitous phenomenon across financial institutions. What was at first touted to be a threat to the traditional banking industry has now become a business opportunity for many. According to research, open banking market size will reach $43.15 Billion by 2026, at 24.4% CAGR.
In the modern world, open banking has empowered banks as well as other financial institutions to share their repository of financial data with non-bank third parties through APIs or open application programming interfaces. Third parties can this way embed their services with banks in order to create an improved consumer experience. In this blog, we will highlight how open banking can accelerate innovation for traditional banks as well as fintech. Let us start by understanding what open banking is.
What is open banking?
Open banking is a paradigm that enables banks to make raw account data available to third parties through a set of APIs in a regulated and secure way. Third-party providers which include other banks, retailers, fintechs, telecoms, insurers and wealth managers, etc. can therefore use their APIs to integrate the data in their apps to offer better products and services to their customers. Open banking makes use of open source technologies to offer greater financial transparency and private as well as open data control options for customers. It opens a whole new assortment of digital business ecosystems through APIs provided by the banks.
Third parties are also capable of enabling bank-to-bank transactions for payments on behalf of the customer, but with appropriate permissions. The best part of APIs is that the publishing bank does not need to worry about how the data and component services they offer are being used, as regulations are all taken care of by third parties.
Open banking for customers
Among the many benefits of Open Banking to consumers, the most important include freedom to choose. Banks often can only offer limited options and the similar set of services to their customers. Open banking, on the other hand, offers them freedom to pick from service providers available, multiple deals and personalized product offerings etc. It also empowers customers to take charge of their finances and avail quick loans, make easy payments through e-wallets, have easy remittances and currency exchanges, and make prudent decisions for account management.
Open Banking For Banks and Financial Institutions
- Competitive Advantage
Open Banking lets banks attain a competitive edge by allowing them to experiment with technological use cases, agreements on data-sharing with fintechs and other NBFC institutions.
- Drives innovation
The open banking model lets banks be inventive and future-ready by letting them understand technology along with the data privacy protocols that exist. It also educates them on changes they need to adapt for a better customer experience. It therefore helps them make a foresighted and informed decision.
- Build Customer Trust
Open banking makes banks more ‘Customer Centric’. With the unison of Banks, Fintech, and open source technologies, together they can offer customers an exhaustive service or product, which will increase customer satisfaction, loyalty, as well as revenue.
Open Banking opens up a myriad of business opportunities for fintech organizations to meet the consumers’ requirements for new and better services such as personal finance management, account comparison, and access to credit services through a single application. With growing competition in the banking sector, most banks are looking to leverage fintech for their benefit.
The Big Players Embracing Open Banking
With amalgamation of regulation and customer expectations with improved technological output, the use cases of Open Banking across industries have dramatically increased. Some renowned names in the industry have taken the lead in leveraging the benefits of open banking.
- The starter API of Capital One’s Bank Account lets consumers apply for a savings account, while sharing some basic data quickly through a third-party site.
- Mastercard is another financial institution who has been vigorously unbundling its financial services into a myriad of component APIs, such as tokenization service that is powering Paypal’s merchant Braintree business.
- US person-to-person payments network ZelleSM, known to have processed more than 60m transactions in 2017's third quarter, is using APIs to re-bundle and consolidate payments components, and then trade them back to the participating banks.
Facilitating Open Banking through Fintech Apps
APIs can offer flexibility and extensibility for banking and finance mobile app development, offering various benefits including:
- Improved interconnectedness by fostering connection in siloed system architecture through a set of specific protocols;
- APIs are essential for the functionality of Banking-as-a-Service (BaaS) which can be offered through an app or a website that connects fintech and other third parties to banks’ systems directly through the use of APIs;
- Facilitating specific customer transactions, such as blocking a credit card, availing credit card, etc with just a few taps on phone
- Standardizing and offering products and services across regions;
- Unifying services across multiple interfaces and products;
Moreover, keeping in mind the excessive usability of smartphones amongst generation Z, mobile apps can become the most reliable way to tap the benefits of open banking while ensuring excellent customer satisfaction. Open banking clubbed with technologies like chatbots, ML for automated loan sanctioning, payment gateway APIs, offering recommendations according to customer preferences in retail, etc. have already made an impact across a number of industries. Datamatics recently built a Cryptocurrency Trading App for a Leading Binary Options Broker in Australia. The app helped the client to make 1650+ bitcoin deposits through the trading platform. It also had a designated wallet for automatic payment settlements with highly secure multi-factor authentication for login.
It is evident that FinTech usage has grown significantly over the past couple of years. Today, every small and medium scale business is reaping the benefits of this robust technology for better customer experience. With Open Banking harboring the potential to transform traditional banking, what's imperative is to make a mindful use of the technology. Consumer’s trust backed by necessary measures prior to authorizing third parties to access customer data is another mandatory best practice. To realize scale and speed while minimizing overheads, fintech companies can leverage our outsourced product development services to accelerate innovation.
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