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Easier, Faster, Convenient: Open Banking

The line between Traditional Banks and FinTech companies was beginning to blur as Banks pivoted their focus to the digital customer experience. Tech and banking partnerships are a popular method for FinTech companies to handle customer finances without a bank charter. In recent years, these technology partnerships have extended beyond traditional FinTech players such as Venmo and Square.

Technology companies with deep pockets are now entering this space. Google Pay will start supporting mobile checking in 2021 and has secured partnerships with several banks. In 2019, Apple and Goldman Sachs partnered to offer a credit card.  Amazon already offers credit cards and is planning to offer checking accounts and to enter the mortgage market.

Open Banking is helping this expanding ecosystem with digitalisation processes.

What is Open Banking?

Open Banking is a digitally secure way to give providers access to their customers’ financial information via APIs, enabling third parties to build new products and services around financial institutions.

Open Banking is growing and gaining the attention of regulatory agencies in the EU, UK, US, and Australia.  While PSD2 set requirements for firms that provide payment services, GDPR introduced the guidelines for collecting and processing personal information.  Consent is just one of the six legal bases in GDPR, which means that consumers own their data and have to give consent to third parties to use it.  Third parties must also inform consumers how their data is treated, and for how long it will be in storage.  What is critically important as well is that each consumer is able to withdraw this permission at any time.

Open Banking is a Win for Customers and Financial Institutions.

It is not surprising that Millennials and GenZ were the early adopters of Open Banking.  The 2015 Millennial Disruption Index, showed that 53% of Millennials believed their bank doesn’t offer anything different than other banks. Brand loyalty was low.  FinTech was used to increase brand loyalty among the digital natives that preferred the ease of robust digital banking and financial app management systems such as MINT and Acorn.

With Open Banking, Financial Institutions get greater insights about how customers behave.  The high integrity, first-party data insights give financial institutions an understanding of their customers.  The result is better products and services. 

Open Banking has the potential to transform the way consumers use financial services, improve competition, and boost innovation through the development of new products and services.

For example, imagine applying for a mortgage without filling out any paperwork online.  Instead, within seconds your account information is shared with a mortgage provider in a secure way, providing access to your statements in real-time.  All the work previously needed for pulling together all the relevant documents to present to the lender is no longer necessary.  Information can now be submitted in a digital format within a few clicks via Open Banking.

The financial Institution can make quicker, more informed decisions, reduce risk, and integrate an effective and seamless Know Your Customer (KYC) process framework.  The lenders get more significant insights as they can get a more comprehensive understanding of the consumers through the use of transactional data to verify identities, income, and run a much more extensive affordability assessment.

The Acceleration of Open Banking

COVID is proving to be the catalyst for adoption in two significant ways.  First, as a result of lockdowns due to COVID, Banks have closed branches and have transitioned to remote service and sales teams accelerating the digital transformation.  The pandemic has already resulted in more online interactions and fewer people visiting branches.

Online BankingAccording to the July 2020 study conducted by Harris Interactive, online banking has increased by 22% in the US, 17% in the UK, and 46% in Brazil.  Subsequently, the decrease of those visiting a bank branch in person was even more profound–29% in the US, 34% in the UK, and 56% in Brazil.

Habits will continue to change the more prolonged the pandemic.  According to the British Journal of General Practice and the NIH, it takes on average 66 days for habit formation.  As more people continue to utilize online banking during COVID, it will become the new normal for a growing number of people.

The second change is the increased preference for digital and contactless financial transactions.  Companies are installing systems that keep the employee and customer safe through contactless payment methods.  As companies change how they will take payments even in person, digital may become the only way to pay.

Many experts believe that changes made today will eventually lead to accelerated broader adoption of Open Banking Worldwide and, finally, the long heralded “death of the traditional wallet.”  Open Banking enables a smoother digital customer experience, minimizes friction, and maximizes efficiency.  Open Banking is here to stay.

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