Open banking opens pathways to digital transformation

This article originally ran in BAI Banking Strategies Daily: https://www.bai.org/banking-strategies/article-detail/open-banking-opens-pathways-to-digital-transformation

We are once again facing digital transformation the likes of which we haven’t seen in a decade. Ten years ago, 80 percent of a financial institution’s features came from connectivity to its core banking systems. Today, that number has dropped to less than 30 percent. This means that most of the apps and solutions that consumers demand come from multiple third-party vendors, connecting not at the core system, but in digital channels. Because of this, having an open banking ecosystem has become crucial.

Open banking is the practice of sharing financial information electronically, securely and only under conditions of which customers approve. All 10,000 financial institutions in the U.S., regardless of size or IT environment, will need to pursue open banking standards and application programming interfaces (APIs) that allow third parties efficient access to financial information.

APIs allow an open exchange of information, giving banks and other services and tools a way to “talk” to one another. And just as the world wide web opened up the internet’s use to billions of people, APIs present financial institutions with an opportunity to grow business at unprecedented rates by sharing services with third-party providers. These providers in turn will put sophisticated, in-demand technology into the hands of millions of consumers who increasingly demand an exceptional digital experience. And it is this digital experience that will drive competition and success for financial institutions.

A culture change

Rather than indicating the end of the road for traditional banking services (indeed not all institutions are inclined to allow permissions to third-party tools that compete directly with products and services they offer), open banking represents a significant opportunity for financial institutions to overhaul core services and deliver key solutions to consumers. Leaders in the market will focus on distribution models that connect fintechs with consumers.

The EY Global FinTech Adoption Index indicates that consumers have already transitioned to fintech applications, with 87 percent preferring to adopt solutions outside of what has been traditionally available at their financial institution. This quiet digital revolution has pushed the boundaries of existing bank/customer relationships, and it will invariably lead to a complete reimagining of the nature of these relationships in the future.

The majority of consumers actively manage their financial lives and pursue payment ecosystems with third-party applications, such as Apple Pay. Open banking recognizes that looking only to financial institutions for innovation stifles the development of potentially exciting solutions, because many of the established players do not have the time or resources to dedicate to pioneering tech offerings.

Open APIs have emerged as the vital enabler underpinning a new era of banking. This new generation of services thrives on an open, collaborative ecosystem of innovative API providers, and demonstrates a relentless focus on delivering an optimal experience for consumers. The financial institutions that participate will boast the ability to deliver personal, relevant connections with consumers while creating next-level digital experiences.

With new open banking standards and the APIs that accompany them, financial institutions can make it easy for their customers to use third-party applications and manage their financial lives whenever, wherever, and however they choose. Up until recently, financial institutions have struggled to figure out how best to work with these fintech innovators. Now, financial institutions will be able to provide both consumers and businesses alike with a type of “marketplace” of third-party vendors — all of which come pre-integrated and ready to use so that consumers have more options for managing money, borrowing and making payments.

Open APIs for business growth

Building an open API strategy drives innovation, helping financial institutions create new products, provide better and faster integration processes, and ultimately provide consumers with a more engaging, richer experience. Community financial institutions today focus on high-touch, high-tech — leveraging technology to grow their business. Open banking is no different. It provides the potential to use technology to thrive and scale on levels that haven’t existed in a decade. Open data sharing will give consumers, for the first time, access to their own banking data, which will enable them to make better decisions about their transactional behavior, investments and savings.

Of all the problems community financial institutions struggle to address, open APIs and open finance will contribute considerably to helping solve them. Financial institutions can use the open banking movement as a gateway to account retention and growth. Consumers and businesses alike will have access to safe credit options with innovation that could meet them at every stage of their financial lifecycle.

For small businesses especially, access to real-time customer data has the potential to be transformational. The funding application process is easier, faster and fairer with less operational costs for the financial institution. Funds can also be tailored to the specific needs of each business and delivered much faster.

Rather than being disintermediated, marginalized and commoditized by companies like Mint and Yodlee, financial institutions can become the resource for lending and earn income based on the additional products and services sold. Over time, APIs could become bank products, generating new revenue streams and reaching new customers. In this way, the business model would shift from product-focused, to Banking-as-a-Platform (BaaP).

Financial institutions should pay close attention to the open API movement and ensure their partners and vendors support this initiative. Regardless of an institution’s size or what its specific IT environment looks like, every one of them will need to build APIs to create open solutions capable of integration. Without integration, the digital banking experience stalls and falls short of where consumer expectations lie today, and where they will go in the future.