Open Banking is the practice of sharing financial information with third parties in a digital and secure way, under the conditions that customers approve through an open application programming interface (API). Its legal framework is regulated by the Second Payment Directive (PSD2), which came into effect at the start of 2018.
It all started with the UK’s Competition and Markets Authority (CMA) when it called for a series of updates and reforms in 2016 into how banks deal with financial data. This was because the CMA issued a report which stated that small banks were finding it difficult to gain new customers, as a handful of big banks controlled most of the market share. In such an oligopolistic market, customers didn’t have much of a choice when selecting a financial services provider, nor full control over how their data was being managed.
Therefore the reasoning behind these new regulations was to inspire increased innovation and competition within the financial services and payments industry, which could lead to future developments and new solutions to help both retail and SMEs customers better manage their money.
Open Banking opportunities for SMEs and banks?
With great challenges come great opportunities, and this logic applies to this situation. Because Open Banking and the ability to integrate APIs make it easier for customers and SMEs to compare accounts and adopt new services and products choosing the best one, this brings new opportunities for SMEs customers and also new challenges and opportunities for banks. As such, banks’ new products and services need to focus on improving a customer’s experience and overall financial life.
When it comes to SMEs, they benefit from having access to other services aside from banking and loans. These include things such as cash flow and payroll management. Furthermore, SMEs can gain from an array of new services that help them reduce operational expenses, automate cash flow forecasting, get faster settlements, and have better overall financial management, among other things.
“Open Banking demands a truly customer-centric approach,” Strands’ CEO Erik Brieva points out. “Individuals and companies can choose to give banks and third-party companies access to more of their data, but they will only do that in return for better products and services. That is the crux of the matter.”
As such, banks’ new products and services need to focus on improving a customer’s experience and overall financial life. By taking advantage of FinTech’s potential via APIs, banks can strengthen the relationship with their retail and SMEs customers, open new customer segments and create new revenue streams.
How does Open Banking work?
In general terms, Open Banking enables customers to access new financial services and products from regulated third party providers. For this to happen, banks have to open their application programming interfaces (APIs) and grant those third parties access to the customers’ bank account data, to either collect transaction information or to make payments. Customers are always in control of what transaction data they choose to allow access to and they can stop access to their information at any time.
Open Banking and the corresponding technologies are driving rapid changes throughout the financial services industry. More technological advancement and a continued relationship between banking and Fintech will undoubtedly continue, and that will help create innovative solutions that meet the expectations of the future.
If you are interested in learning more about Open Banking, this White Paper delves deeper into the opportunities of the new paradigm.