Financial Institutions Reject Open Banking at Their Own Peril

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Banks Should Embrace the Opportunities Created by Open Banking

The growth of FinTechs and our increased reliance on online payment platforms has led to a sharp rise in digital banking services, as more and more customers link their accounts between different providers. This trend, enabled by profound leaps in technology, has established a newly connected digital landscape and created the concept of “open banking.”

The growing popularity of open banking has sparked a crucial debate about who ultimately owns the data – the customer or the company. While many banks are strongly against sharing customer data, in the end they’re sacrificing more than they’re saving.

The Open Banking Movement

For the purposes of this article, we’ll define open banking as the consumers’ ability to securely share data between their financial accounts/providers in order to enable other products and experiences.

Over 90% of consumers use technology to manage money for simple financial tasks (i.e. paying bills, banking transactions) – and there is a growing appetite for more personalized services, including financial wellness and investing. Furthermore, 80% of U.S. consumers say that “it is important to be able to connect my bank account to the digital finance apps and services I choose.”

The open banking movement is strongly driven by consumer demand for seamless, hyper-personalized experiences – and customer expectations continue to soar in this area, thanks mostly to companies like Amazon, Netflix, and Spotify.

Major advancements in technology, particularly within data and analytics, have set the stage for widespread adoption of open banking by companies and consumers. This, in turn, has led to a surge of innovation in the financial industry, resulting in a wave of new products and services.

Perhaps the most interesting development is how the rise of open banking is spurring a personal data revolution – enforcing the idea that the customer (not the company) owns their data. This flip in the power dynamic is changing the data experience and putting the control in the hands of consumers. For the first time, individuals are realizing ways to reap the benefits of their own data far beyond what their bank has to offer.

The problem is that many banks are territorial – they think they own their customers’ data and they don’t want to share it. The CEO of North American Banking Company is quoted saying, “I truly believe it is my data and I don’t have to share it, and I don’t have to give it to my customers if I don’t want to.”

This short-sighted view of open banking and the power of data is becoming an impossible position to defend, especially with regulations and policy requirements looming on the horizon. There are some key opportunities for financial institutions that embrace open banking and learn to evolve with the changing marketplace.

Open Banking Enhances Onboarding & Origination Opportunities

When it comes to onboarding new customers, the first (and perhaps most obvious) benefit of open banking is that it acts as third-party fraud prevention. For origination scenarios, it prevents fraudsters from attempting to open and/or link bank accounts using false or stolen identities.

The process of linking an account is itself a deterrent against fraud because it’s an action that can only be done with legitimate information. By requesting bank aggregation data, you’re enhancing the authentication you’ve already completed and improving the verification of what follows in the next steps of the onboarding process.

Open banking also provides a major advantage for first-party fraud prevention, which typically includes people who tell “little white lies” about their financial situation (such as increasing their income) or who have no intention of paying their bills.

It is extremely difficult for individuals to successfully falsify banking data. The data verification (for income, debt, etc.) weeds out people who are misrepresenting their own information, allowing you to distinguish between what customers are claiming and what’s being reported by banks. Linking to third-party bank data allows you to observe a person’s income and provides more data points for authentication purposes.

This is an intelligent use of friction that creates a level of seriousness for the end user, who is more likely to abandon an application when they encounter certain verification steps. With the help of open banking, you can use friction to provide more security where needed while also vastly improving your ability to remove unnecessary friction from the onboarding process (and throughout the entire customer lifecycle).

A third major origination-related benefit is credit risk enhancement. The knowledge you gain from open banking significantly amplifies your understanding of the risk associated with each customer in real-time and empowers you to make more informed credit risk decisions.

An aggregate data view means you can better assess an individual’s ability to pay because you’re observing income, rent, average balances, velocity spend, and more (including undeclared debts and hidden debts that aren’t reported to credit bureaus) – while also monitoring changes over time. For customers with variable incomes, you can see a longer view of their data, which gives you better perspective and more accurate evaluations.

Open Banking Expands Customer Management Opportunities

Financial institutions that embrace open banking see their customer management opportunities increase in several ways.

First within account management – a critical area of customer development that’s easily and often neglected. Open banking unleashes new ways to address riskier, subprime customers because you can access more data to gain greater understanding. It also improves credit line management strategies and tactics, allowing banks to identify customers who will have shortfalls and address those scenarios more effectively (and efficiently).

The second significant opportunity lies in personalized financial management, which includes “next best action/sale” strategies. With open banking, you can see each customer much clearer because you’re viewing all their data in one place. It enables you to ask better questions to engage them and advise better products/services that can add value to their lives.

Today’s industry leaders are successful because they understand the customer in a holistic, multidimensional way. They’re using open banking and advanced analytics to help identify product opportunities, curate offers, and tailor communications.

Another advantage to embracing open banking is collections enhancement. It empowers banks become more proactive and helps eliminate NSF and RTD fees. It also enables you to prioritize customer calls and gives collectors the ability to see real-time data. For example, you can look at a customer’s account balance before withdrawing funds and give them some options to avoid overdraft. This is technology that allows you to position your bank as their partner, not their adversary.

Customers want a bank that looks out for them and treats them well, especially during difficult times. Most leading banks are now using platform technology to leverage the power of open banking, which delivers artificial intelligence (AI) combined with the organization’s human intelligence (real advice and emotional intelligence) to provide optimal customer experiences.

Looking to the Future: A Modern (Open) Banking Ecosystem

The global open banking market is expected to reach $19.4 billion in 2022, and it’s projected to grow to $48.13 billion in 2026. People are more comfortable with open baking today because our lives are so digital, and younger generations don’t view it negatively since they link accounts all the time.

The U.S. is arguably the most mature open banking market, due to widespread adoption of data aggregation tools (like Plaid, Yodlee, Finicity, etc.) and their use in digital banking. However, the Asia-Pacific market is expected to be the fastest-growing region during the next several years.

As for the regulatory landscape, the EU has already taken action to address open banking, data ownership, and third-party access with its PSD2 regulation (which is often associated with the UK’s Open Banking Standard). In North America, both the U.S. and Canada are discussing future regulations, with the CFPB already stating that it views open banking as a critical tool for leveling the competitive landscape.

Underlying data has great power and should be used to generate greater value for the customer. Banks must learn to embrace this technology if they want to be truly customer-centric and outperform the competition.

Thanks to open banking, the way we view our finances will never be the same.

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