Time to open up: Open Banking Promises Better and Safer Financial Services

Previously, we caught a glance of Open Banking, covered the underlying idea of it and discussed the fuss behind the EU regulatory push.

This time we‘re exploring something a bit different. In the name of all the overly-intensive police dramas, we‘ll be lining up all the stakeholders – the banks, the upstarts, the customers – against a cement wall, taking mugshots and questioning their interests in Open Banking.

People say that if you want to see what man is capable of – look at his motives. We‘ll be doing just that. Dress up, cover up your badge and bring some coffee, oh and don‘t forget to put on an empty facial expression – we‘re seriously investigating this.

This article explores the potential of Open Banking. We highly suggest you read up on the general idea of it in part one and then come back for the second piece of the cake that is just below.

Suspect #1 – the FinTechs (Third-parties)

Financial technology upstarts will, no doubt, take full use of the mandated data sharing.  

Finding themselves newly acquainted with the treasured customer data, they will now offer every financial service imaginable – from price comparison to instant payments to data brokerage. They will definitely be staking it all on Open Banking system to hold.

Suspect #2 – the Customers (Yourself included)

Open Banking framework will ensure that, the aforementioned products are designed to satisfy all your needs and urges. More competition meanwhile, will make them affordable and provide a more customer-centered services.

Financial applications, which display all of your bank accounts in one screen, will help you budget, and view a more accurate picture of your finances. Other apps might look at your transaction logs and combine information from multiple providers to identify the best financial products and services for you, such as a new savings account that would deliver the highest returns.  

Unspent income could even be designed to be transferred into a pension account with a press of a button – helping you grow to be more responsible with personal finance. Some providers might even offer you crypto-related projects if you swing that way.

Even the most entrenched financial institutions will benefit from Open Banking, if they’re imaginative enough.

If you’re under financed or running around with a “thin” credit file, FinTechs could review your loan requests with the help of more accurate AI-powered (Artificial Intelligence) client screening technologies. Because they harness the power of AI, they just might say “Yes” to that motorcycle on credit you’ve been dreaming of.

More options can’t be a bad thing for customers. Surely, the paradox of choice is strong with this one, considering the overabundance of the new financial service providers.

But looking at the long-term, more choice, in economic terms, has always been beneficial for customers as they can slam the door to the faces of providers that treat them with high prices, neglect or indignity. Also, more choices over time reveal user preferences and allow for service offering evolution.

Suspect #3 – the Banks (The providers)

Surely, this can’t be a good thing for banks. They must anticipate new digital competitors showing up on their turf, legally using their collected data and then offering their customers FinTech services. This seems like a daylight robbery – or, at the very least, a game of Texas hold’em where one side is forced to openly display the hand.

Fearing a loss of business, they’re thus going all-in, shouting “Massive data security risk”.

Uncovered Suspect #4 – Data security

Some concerns about security and privacy are legitimate as sharing data across multiple institutions opens up vulnerabilities. Banks claim that with requests for data access and payments originating from a wide range of third parties, there will be even more targets for cybercriminals to attack.

While true, that is a misconstrued description of how things will work under Open Banking system.

In fact, with the possibility of data leaks, FinTechs will need to do some serious convincing of national regulators that their security regimes are solid and trustworthy. All will submit to annual inspections and the newcomers will also take out fraud insurance, which will be denied if their protections are not cutting-edge.

Furthermore, contrary to the chaos and anarchy predicted by some banks in the payment industry, payments will enjoy even better security, because the EU directive also demands robust authentication processes, involving a two-step verification.

So, the security is not a problem. Bank, in fact, might even learn a thing or two from the newcomers. The problem is, once again, their reluctance to innovate, which is shameful, considering the potential.

Uncovered Suspect #5 – the Potential

Even the most entrenched financial institutions will benefit from Open Banking, if they’re imaginative enough.

Lower marginal costs when delivering financial services through digital channels is an obvious revenue-adder. Banks will also rejoice audit trails that are inherent to the system of APIs (Application programming interfaces) – this new way institutions will share data is a far better option, if the alternative is information getting scrapped off the providers’ screens (see part one).  

Regulated FinTechs will submit to annual inspections and the newcomers will also take out fraud insurance

It is also not hard to imagine banks making a nice profit by partnering up with these FinTech providers. Banks could employ them to screen potential applicants for loans and thus expand this market in a controlled manner. PwC, a professional services network, envisions a 186% jump in loan approvals by 2022 due to use of external data, which could be a boom for both banks and unbanked individuals.

Economies of scale would also be easier to achieve as even a small- or a medium-sized bank could aim to mimic the coverage of a national bank by assembling a portfolio of various digital products that are not offered solely by it.

Banks could also leverage partnerships to maximize consumer engagement. With the average user spending only 0.9 minutes daily on their online/mobile bank, it’s clear that banks could add a bit more spice to the mundane tasks of banking. Tips on personal finance management could be offered to the clients with low-balances; digital assistance could be provided to the well-off individuals looking to invest or save.  

Criminal record #OB2368

Surely, things won’t be entirely smooth – there will be bumps and road ahead as with all good things. But if we look purely from the view of a clear motive, all of our stakeholders fit the description of a beneficiary: everyone will be better off under the system of Open Banking.

From providing capital to the unbanked to making personal finance more adoptable for regular Joes and Janes, the potential hidden inside Open Banking is a thought experiment not fully explored. Open Banking is going to reshape the financial landscape, that's unquestionable. The things that we are yet to find out are how and when.