As open banking makes its foray across the globe, traditional banks are faced with a dilemma— will it herald their end?
An open banking system essentially means that a bank begins to operate like a platform company— connecting people, processes and banking assets through public APIs. While most banks concede they can no longer silo their data, open banking takes sensitive data into the public domain—an ultra-disruptive move for an industry that has always struggled with data security and privacy. While the risks are real, it’s critical for banks to understand that embracing open banking is vital to sustained success. Why? Simply because the benefits of implementing open banking far outweigh its potential dangers.
Here are three significant reasons to consider opening up to open banking:
Enhances customer’s overall banking experience
A Statista study shows that 71.8% of Gen X customers make use of digital banking. This rate is expected to increase to nearly 75% by the end of 2019. Digitally savvy, modern customers have high expectations of their online experiences and demand seamless integration between various devices.
Open banking will not only provide these customers with an omnichannel experience, but it will also allow banks to leverage the functionalities of open APIs. Instead of spending time and effort reinventing the wheel, banks can optimize and build upon the efforts of other players, quickly making customizations to suit specific requirements.
A great example of a bank that has leveraged the potential of open banking is Barclays. The bank’s mobile apps offer customers API-based features such as an integrated view of their finances across accounts and banks, and the ability to easily transfer cash with just the recipient’s phone number.
In India, open banking emerged when the Indian government unveiled the Unified Payments Interface (UPI). UPI has played a major role in transforming the face of conventional retail banking. One of the first Indian banks to launch API banking services and digitalize the B2B supply chain was YES BANK. Since then, several other banks like ICICI, Kotak Bank, RBL Bank and DCB Bank have followed suit.
Enables more innovative, customized and relevant product offerings
Using open banking, banks will be able to service customers with tailored and contextual products to improve customer experience. For instance, based on the real-time view of a customer’s payment to a travel agent from an external account, the bank can reach out to the customer with a vacation loan. Such contextual offers delight customers and help maintain customer loyalty. Standard Chartered Bank has been a leader in this space. At a panel discussion on Open Banking Amit Arora, Global Head, Digital Programmes & Regional Head, Digital Banking, ASEAN and South Asia said that the company has been realigning its offerings to suit individual customer journeys.
Open banking also presents end-users with more options when managing their financial transactions. They no longer need to depend upon a certain bank but can scour the market for more operators and manage their finances through third parties. Thus, open APIs will foster a culture of excellence where everybody wins and the industry as a whole becomes sharper and more agile.
Builds new streams of revenue
Opening up to open banking will enable banks to identify new sources of revenue: they can facilitate transactions for a fixed fee or on cost-sharing basis, work alongside third-parties to service customers in the unbanked or underbanked categories, and grow their balance sheets by monetizing core financial services.
API development initiatives that require major efforts and provide low returns can be pooled with competitors, thus reducing the burden of individual players. Or, banks could buy off-the-shelf APIs and incorporate them into the existing operations at a minimal cost. Internal APIs that have already been developed can be ‘sold’ in the open market, helping banks recover development costs and even profit from it.
A case in point is the Singapore-based DBS Bank that launched an API platform with 155 APIs across 20 categories in November 2017. It wasn’t long before major brands were tapping into these APIs—McDonald’s currently uses an API that enables faster payment through cashless transactions, social enterprise Homage simplifies online transactions for senior citizens through point redemption and PropertyGuru, an Asian online property group has been able to offer customers instant affordability assessment. As a result, DBS now earns twice as much income from its digital customers as its competitors.
Open banking: Heralding a new era in the banking industry
Eventually, in the ever-evolving data-driven economy, open banking will be difficult to avoid from a competitive standpoint. Banks that prepare ahead for the inevitable change will find themselves profiting from their early-move. A Confederation of Indian Industry (CII) report reveals that by 2020, consumer banking, funds transfers and payments will be the most disrupted sectors. All of these will be implicitly driven by open banking.
While this new environment will be more competitive, banks will also find that there are infinite possibilities for growth and innovation, limited only by their own appetite for change and creativity.