Open Banking Opportunities and Challenges

Imagine if your bank could, based on the data, intuitively tell what products you might actually need, instead of spamming you with offers from loans to savings accounts and everything in between. Open banking offers financial institutions, big or small businesses, and customers plenty of opportunities as technology advances across the financial sectors. However, there are still some concerns about the security of the data, which we will share more about in today’s piece.

What is open banking?

Open banking is the integration of banks with third-party services (fintechs) to promote data sharing and better financial services. Budgeting apps, for example, enable customers to better calculate their incomings and outgoings, set savings goals, and reach their targets faster.

It’s not about allowing banks to sell their data, but instead ensuring that information is available between financial providers to make the lives of consumers easier. It must be all done securely and with the explicit consent of the customer, in line with the open banking standard. Data security will protect the integrity and privacy of information, both when it’s in transit and storage.

Due to the ability to link accounts and connect services, it provides many customer benefits. It’s the convenience that provides an advantage.

Let’s take the example of applying for funding as a business. Filling out all of the information manually can take around 40 minutes, and that’s if you already have the documents and financial statements to back up your claims. But by using an open banking provider, this account information can be automatically pulled into the application, and the user simply has to scan it and double check everything is correct.

How does open banking work?

It works through a technology called application programming interfaces, or APIs. These programs are built by the banks, account providers, and technical service providers, and work as a set of instructions for businesses on how to access the banks’ data securely. In most cases, the contents of an API are pre-agreed by the government, regulators and the banks themselves.

There are three types of APIs used in open banking:

1. Data API: sharing account holder information, names, locations etc
2. Transaction API: initiate payments or collect transaction and categorization dat
3. Product API: provide personalized product recommendations for consumers based on purchase history and need

Ultimately, open banking is about innovating the financial world and APIs allow businesses to leverage the data in order to build a better customer experience.

Who takes part in open banking?

The major players in the ecosystem are:

• The banks: the original, traditional data collectors, these organizations hold the keys to open banking
• The regulators: the rule-makers that aim to preserve the integrity of open banking and ultimately protect the customer (in line with the fraud act). In the EU, open banking is possible thanks to the PSD2 regulation.
• The third party service providers: the innovators who’ll use banking data to create better digital products, services and apps
• The customer: the end-user who must consent to the data sharing in order to reap the benefits of open banking

There are surprisingly many players in this ecosystem. In the United Kingdom and EU markets, the ecosystem is regulator led, meaning the authorities have the final say on who can participate and what they can access. This operates in direct contrast to the United States, where the banks are the players making decisions on the direction of the technology. For example, the “big 9” regulation in the UK plays a key role in mandating that the nine largest incumbent banks and their products are bound by open banking payment regulations.

What are the advantages of open banking?

Ultimately, open banking is about innovating the financial world and APIs allow businesses to leverage the data in order to build a better customer experience and introduce new services. It’s key areas of benefit including:

• Data driven decisions
• Optimized processes
• Fast market penetration

Data-driven decisions

Thanks to the easy access of financial data, both banks and third party fintech providers can make more targeted decisions.

For example, Revolut offers variable recurring payments through open banking services, giving customers a clear view of their subscription spending. Using secure account information services, the app connects to a user’s bank account to provide accurate financial data and spot services they no longer need. These subscriptions can then be cancelled instantly, without contacting the original service providers, showing how open banking implementation entity standards benefit everyday users in the UK.

Moreover, access to open banking financial data helps reduce mis-selling in the banking and finance industry. Under the UK’s Consumer Duty rules, financial institutions must justify their product offers to customers. Using open banking services, companies can securely share and access information to check if a customer has previously applied for a business loan. They can then offer a suitable business credit card for long-term financing.

Optimized processes

With integrations, open banking makes it easy for banks and businesses to optimize their processes.

For example, businesses can use APIs to automate the reconciliation of their invoices. With a program to search through transaction data from the bank, invoice data can automatically be matched to bank outgoings. Not only transaction amounts, open banking also allows account names to be matched to vendor names, effectively ‘double checking’ the invoice payments.

Of course, that’s only one example of the optimization benefits of open banking that gives institutions more internal control. But by harnessing the efficiency of this technology, businesses don’t just gain operational agility. They’ll also notice cost savings as the price of both manual workloads and their errors is decreased.

Fast market penetration

For third party service providers, one of the major benefits to this ecosystem is instant credibility. In the traditional fintech world, no amount of innovation can bypass the time and effort required to grow a customer base. In fact, this can be a costly practice, as brands aim to build their awareness, convert followers to customers, and be found online.

But in open banking, aligning with the APIs of big banking institutions enables third parties to leverage their already-established customers. This reduces the barrier to access in the payments market, and enables new businesses to gain market credibility quickly. It may also save on some of the marketing costs that businesses traditionally have to absorb as they seek to build brand awareness.

What are the challenges?

Likewise, there are some key challenges to consider before you dive head first into the open banking ecosystem:

• Inconsistent service quality
• Hidden costs
• Questions over how secure and private the data is

Inconsistent service quality

Without the right regulation, any old Joe can essentially use the APIs to build their own app or service that utilizes open banking data. And that leaves the door wide open for inconsistencies in service quality, security and general usability too.

For example, one business platform could have all the bells and whistles, offer round-the-clock customer support and elevate its user experience to provide brilliant service quality. Another could simply meet its regulatory requirements, as that is all that is required to be on the market.

With inconsistent service quality, customers could be put off by the overall concept of open banking. So players need to do their own due diligence in order not to limit their participation.

Hidden costs

Unfortunately, it costs financial institutions more to manage transactions through open banking than through traditional options. These costs may be passed onto the third parties, or to the customers themselves. And they’re not such an attractive prospect, no matter what the technology can do.

Moreover, the cost of incumbent organizations migrating over to open banking is very high. But the alternatives are much worse – with banks at high risk of being left behind if they can’t integrate with the service providers that customers need in time.

Therefore, it’s up to institutions to find the best and most efficient way to implement open banking and move their transactions into the open banking system, and potentially absorb the short-term costs in order to gain a long-term advantage.

Security vulnerabilities

When open banking was first introduced in the UK, there were concerns about the security of customer financial data. Under the UK’s Payment Services Regulations and the Competition and Markets Authority’s oversight, these concerns have eased. Strict security standards now apply to both banks and authorised third-party providers. The central bank also plays a role in setting systemic risk controls for payment innovations.

For example, money laundering, while harder to do digitally, may be possible if fraudsters can get around the ID verification requirements of open banking.

In order to get around this challenge, businesses should ensure they meet their regulatory requirements, provide payment services securely, and follow best-in-class software security protocols.

For example, Trustpair to protect against payment fraud. Our solution provides ongoing account validation to make sure you’re always paying the right beneficiary. Request a demo to learn more!

To recap

Open banking is all about making open data and financial information accessible to elevate the services and experience for customers across the UK population. It works through APIs, and can benefit banks, third parties and customers with data-driven decisions and growth. But there are some security concerns around open banking, and players should solve this problem first.