Is open banking an open opportunity for greater competition or a threat to the current banking data infrastructure?
Are you ready for open banking?
Open banking is coming—and in a few countries, it’s here. Some banking leaders are thrilled by the opportunity it presents. At the same time few others worry that open banking is yet another way for FinTechs to chip away their business & customers. Who is right? Both the thrilled and the worried are correct about open banking. Some traditional banks will use open banking to make their relationships with customers even stickier. Those that don’t prepare properly risk losing customers.
As we see it, the open banking opportunity outweighs the threat. To take advantage, you need a proactive approach to open banking and an organization aligned to thrive in a digital-first world where customers have more choices.
What is open banking?
First, let’s define open banking. Open banking allows third parties access to a banking customer’s personal and financial data, with the customer’s consent. The idea is that these third parties will offer high-value products and services to the end customer that use the customer’s financial data. Secure application program interfaces (APIs) will provide these third parties access to the data.
Here’s a hypothetical example. A FinTech could offer an innovative tool that helps people manage and reduce debt using payment recommendations informed by the customer’s real financial data. Thanks to open banking, the customer gets easy access to a tool that would otherwise have required significant data entry.
What does the bank get? Obligations, risks, and opportunities. The obligation is to follow the relevant regulator's rules for open banking. These include enforcing strict measures to ensure that the data is safe even when used by outside systems. Other than the risk of exposing their IT infrastructure to the outside world, the bank risks losing the customer to related services offered by FinTechs, such as credit products. And the opportunities are to win new customers, keep current customers, and unlock new revenue potential.
Seizing the open banking opportunity
Bank customers are the clear beneficiaries of open banking. They get to use the innovative services they choose easily. It becomes simple to try a FinTech’s services without friction or fear of compromising their personal information. FinTechs can offer free trials that don’t require much effort on the customer’s part. Banks become the primary source of customer data, but no longer retain exclusive access to their customers’ financial histories.
Some banks may not like open banking, but it’s coming. And traditional banks that move swiftly can outmaneuver FinTechs to unlock the value of their existing relationships with customers to retain them. The key is to offer innovative digital financial experiences within the familiar confines of the bank.
Think of the hypothetical example above. A bank that offers a better debt reduction tool would be positioned to keep the customer. That doesn’t mean that traditional banks have to create every conceivable financial experience ahead of FinTechs. Banks simply need to offer a few innovative experiences that complement traditional banking services. For a broader array of innovations, the bank—thanks to open banking—can partner with select FinTechs. Banks can also use their data to help customers find appropriate non-financial products with partner businesses in other industries, opening a new revenue stream.
Ingredients for open banking success
The promise of open banking has inspired an innovation race. Within FinTechs and traditional banks, people are working to create products with new value propositions and to improve on proven financial products in new ways. All banks and other participants will be required by regulators to keep customer data safe.
On the technical front, banks will find that adopting a more open architecture enables a smoother transition to open banking. With an open architecture, it’s more straightforward to allow secure, API-based connectivity to core systems. But an open architecture is only the first step.
Open banking will accelerate the transition to the digital-first financial world. In the digital-first world, agility and innovation drive success. Based on our experience working with banks all over the world, we’ve seen three elements making outsized contributions to agility and innovation during transitions to open banking:
- Insight-powered user experiences: Banks should strive to create digital financial experiences that address true user needs and motivations. This process begins by using human-centered design and empirical research to inform product development.
- Cloud at scale: Thanks to the cloud’s resiliency and elasticity, banks that migrate to the cloud at scale will be better positioned to build a foundation for enhanced security and customer-focused innovation.
- New ways of working: Banks must shift away from siloed and slow workflows to new ways of working, like Agile and DevSecOps. These new ways of working aren’t just faster—they foster a culture of innovation that unlocks the true value of a bank’s technology and financial expertise.
Take an agile path to open banking
While open banking is taking different forms across the world, the trend is unstoppable. It’s time to position your bank to lead—rather than follow—with open banking. At Amdocs, we help leaders in highly regulated industries realize large-scale goals. We’ve led digital-first efforts at more than 40 banks, and our specialists have the expertise needed to accelerate the changes required by open banking.. We’ll listen, and help you find ways to realize your open banking vision sooner.
About the authors: Dror Kaplan is Vice President of Operations and Business Development for Amdocs Financial Services, and Ritesh Andley is Director of Banking and FinTech for Amdocs Financial Services.