Open Banking: what it is, how it works and why invest ASAP

In recent years, the banking industry has taken strides to improve customer satisfaction, reduce costs and, mainly, compete with fintechs and technology giants.

In this movement, the term Open Banking becomes a promising reality.

In this article, we will demystify and simplify the open APIs concept for banks. Keep reading to see what benefits are for banking institutions, their customers and more!

The banks’ challenges with Digital Transformation

Before we go deeper into the Open Banking concept, we need a contextualization: just like the rest of the market, banks face numerous challenges with Digital Transformation. The growth of Fintechs – startups that provide financial services using software and other modern technology resources – is an example.

Unlike traditional banking institutions, Fintechs have realized early that financial services of all kinds (money transfers, loans, investments, payments, etc.) need to integrate perfectly into the lives of modern and sophisticated customers today. Thus, they arise taking advantage of the business and private life digitization movement.

The strength of this wave lies in the use of emerging technologies such as Big Data and Artificial Intelligence to optimize the consumer experience and fill gaps in the financial system.

Also the big techs, tech giants, are eyeing the financial industry and dare threaten the banks’ hegemony. Amazon, Facebook and Apple, for example, already experience financial transactions, especially for payments.

In addition to the competition with Fintechs, the industry itself must compete with each other to provide better customer experience, innovate, differentiate, bring process automation to a new level, and other needs in the hyperconnected world.

But, most of the time, banking institutions don’t have tech-innovation professionals to think, develop and implement new products aside from 100% digital services that are aligned with consumers’ wants and needs.

All of this has created the perfect environment for a fully digital financial ecosystem in developed countries and rapidly changing in the developing ones; a reality that knocks on the established banking organizations door.

Open platform banking, public APIs and outsourced applications are in operation, giving the cards in the segment and waiting for partnerships (with startups, IT companies etc.), unprecedented in preference.

What is Open Banking

Open Bank is a term that refers to Open Innovation methods designed exclusively for the banking industry.

Within what we call Open Banking is the practice of collaboration between traditional banking institutions with startups, Fintechs and technology companies. These partnerships result in innovative solutions and applications.

And this is only because application programming interfaces (APIs) allow third parties to access financial information efficiently, which promotes new applications and services development. They also facilitate the collection and sophisticated analysis of exponential volumes of data.

Open APIs are great opportunities to create new banking business models, initiating the much-needed Digital Transformation process, responsible for taking financial institutions out of the comfort zone and guiding them toward user-centric strategies.

Open Banking proposes the elaboration of products and services online, 100% digital that generate advantages for the end user. Yes, the idea is not to solve the bank and its developers’ problem, but that of its consumer.

Ideally, an Open Banking strategy should result in a better experience for consumers. The difference between the concept and other routine strategies in the market is the new scenario created by it, in which account holders access services and bank functionalities from third-party sites and applications.

The financial institution ceases to exist only in its own domains and begins to have contact with its client in other digital spaces, expanding its performance, public, services portfolio and time of contact.

The bank’s open API platform must be able to connect the account holder, more specifically, his information, to other platforms of his choice. The power of choice is user’s; the data connection is from a financial institution.

What looked like a distant future is already a reality and takes away the sleep of many banking institutions around the world, who are running behind to take back the lost space for Fintechs.

Impacts of Open Banking

Innovative financial technology initiatives are rapidly stimulating adoption in developed markets such as the UK, Germany, and the US. But there is a great opportunity in emerging markets that can benefit greatly from an open banking standard. For example, in Latin America, only 51% of adults have a bank account.

Instead of “fighting” just for this active percentage, it’s interesting that banking organizations focus on helping those who are interested in financial services to find the right product. And they can do this more efficiently with a good Open Banking strategy.

On the other hand, banks are great platforms for generating informational inputs. An infinity of transactional data passes through their systems all the times. If data is the new oil, the banking industry has a gold mine in hand.

The Open Banking approach follows a trend that gains more and more strength and relevance in the market: the API-fication, where transactional data is customers’ property rather than the Bank – and they decide how to use them.

Starting with cybersecurity, the open bank helps clients securely share their financial data with other institutions through the use of programming interfaces, better known as APIs.

In short, in Fintechs’ time, an Open Banking strategy creates new competitive levels, encourages technological and business innovation, and puts the customer experience at the center.

7 Reasons to Invest in an Open Banking strategy

Here are the seven advantages that an Open Banking strategy can offer your bank or why it is worth investing in this trend:

• Monetization of services: a significant increase in profitability, from better use of data to meet and serve customers more efficiently;
• Cost reduction: better use of technology to reduce spending for  the banking institution and for customers and partners;

• Improved customer experience: differentiation of competition within the industry and between Fintechs and big techs, from consumer satisfaction;

• New products and services: disruption culture to generate the most profitable products and services that meet the needs of the target audience;

• Optimization of development and research of solutions: through data strategies, it is possible to make research and development more efficient, fast and cheap;

• Accelerating digital transformation: By partnering with startups and IT companies for strategy, for example, it is possible to overpass the barriers to digital transformation;

• Value gain: in addition to the customers’ perception and other stakeholders, banks that work with open innovation raise their overall market value.

How to prepare for Open Banking

As you’ve seen, Open Banking’s efforts are big business for banks, startups and IT companies. They also favour customers and, with the industry moving this way, they can modify a country’s economic ecosystem.

To conclude, we recommend two initial steps for banking institutions that want to make open innovation their leap into the future:

Digital mindset

It is essential to overcome the past and create a culture where processes and services are thought and executed in the digital environment. User-centric strategies, agile ecosystem (especially for IT), risk management and process debureaucratization, among other initiatives, are part of this effort. With the help of expert consultancies and leadership training, it is entirely possible to implement a digital mindset in a shorter time.

Operational tech-driven

We also recommend incremental investments in internal API platforms, APIs open to the public, cybersecurity, and cloud computing. All this to build an infrastructure that supports and guarantees reliability to  Open Banking strategy.

MJV Innovation Lab

We are at your disposal to help your bank implement an Open Banking strategy. Through the Innovation Lab MJV we can assist you in this effort. We already have several successful cases with national and international banking institutions.

Contact us and see how we can help!