Open Banking and its Effect on Banking and Fintech

Open Banking is an evolving and innovative norm in consumer banking. Open Banking refers to providing access to consumer banking through the use of Application programming interfaces (APIs) to third-party service providers. This provides open access to banking transactions and other financial data from Banks and NBFCs. This enables networking of accounts by consumers, financial institutions and third-party service providers for sharing the consumer data. Customers are required to provide consent for the bank, allowing accessing their data with third-party service providers under defined compliance.

Customer’s shared data is used by the third-party API’s for comparing the transactions and historical transactions to a wide range of financial service options.

New Market trends and policies are created by aggregating customer’s shared data available to the third-party API’s. This enables customer data to be shared with other financial institutions in a secure way instead of data centralization. The use of networks enables multiple other business opportunities for the market players and customers have more options and information to make their buy decisions for various products and services.

Advantages of Open Banking

The APIs now can look at the customer’s historical transactions to identify and offer the best possible financial products and services to them. The APIs can look at the customer’s transaction data and nature for suggesting to them what would work better for them. For example, suggest a better Mutual fund to reap a high rate of return and which is safer or suggest better savings account for earning a higher rate of interest or suggesting a credit card which charges a lower rate of interest. The open banking can also help in suggesting the home loan slab and interest rate which customers can afford to pay.

Thus Open banking helps in minimizing the financial risk level for the customer as well as the financial institutions. Open banking also helps in the identification of the problems sooner for taking appropriate actions for mitigating the financial risks. Open banking, with the advent of better technology, results in lowering the costs for small and upcoming banks and providing better customer service. This helps banks to manage their customers better and strengthen their Customer Relationship Management resulting in customer retention.

Banking and Fintech Transformation with Open Banking

Open banking not only brings out many benefits for end users and fosters innovation within the Fintech sector, but also increases the competition between banks and non-banks. Access to financial data can bring in many new business models within the market. Banks’ role will also change as open banking is adopted. Fintech can finally put an end to screen scraping and open up more customer base and market place for services. There are multiple possibilities and use case each segment within Fintech can think of. The PWC report “The Future of Banking is Open” identifies five broad categories for an open banking application.

Open Banking also increases the liability of the financial institutions by posing higher security risks to customers’ financial data. It is also known at times for malicious attacks to wipe customer accounts. Hacking and data breaches due to poor security measures have become more of a threat in the advanced world.

Overall, everything comes with its boons and disadvantages. It’s in the best interest of customers to leverage Open banking services ensuring proper security practices are being followed.

Author
Kumar Iyer | Director Customer Success – Fintech

With over 22 years in the IT industry, Kumar Iyer has worked in various capacities such as design architect, project manager, program manager and business head. He started his career as a C/C++/Java programmer and today is instrumental in managing & delivering Fintech solutions for GS Lab customers. He has a keen interest in emerging technologies and how they shape the Fintech and IT solutions.