There’s no denying that the financial industry is changing, and in ways that many people can’t predict. One of the most important evolutions of the industry is the pivot toward open banking technology and services.
Indeed, many financial services providers – including banks, credit unions, and lenders – must be aware of the growing demand for open banking solutions among their consumer bases. This guide will break down what open banking is and how it may impact the future of the industry at large.
What Is Open Banking?
Open banking – also called open bank data sharing – is a financial practice that opens up access to consumer banking, transaction, and any other financial data via third-party financial service providers. Open banking gives consumers greater control and access to their data and financial information through third-party applications.
An example of an open banking system is when a bank or financial institution like a credit union gives access and control of their clients’ personal and financial data to third-party service providers. Under most circumstances, consumers must give permission or consent to allow that bank or financial institution to do this.
Once consent is given, third-party providers implement APIs to use the customers’ share data and provide various services. For instance, a third-party organization might:
- Compare customer accounts and transaction histories
- Offer different financial service options to certain consumers based on past actions or purchases
- Aggregate data across multiple financial institutions to create customer avatars or marketing profiles
- Make transactions or account changes on behalf of customers (again, with explicit permission from those customers), etc.
Think of open banking as a financial philosophy that focuses on the free flow of financial information and customer banking data.
Open banking became necessary after the European Union’s Payment Services Directive. Without getting too technical, this legislative change required banks to give third parties access to consumer financial information. The goal was to allow trusted third-party providers access to banking information, like transaction histories. In doing so, banks were forced to give consumers much more control over their finances.
Even though open banking was originally only needed in Europe, it has quickly become an important trend in the global financial industry. Polaris Market Research indicates that open banking should be valued at over $128 billion by 2030.
Open Banking Benefits to Consumers
Open banking produces significant consumer benefits, which is one of the reasons why this philosophy has taken off in recent years. Those benefits include:
- Customers get greater access to their data, increasing their trust in the institutions they use.
- Furthermore, because third-party apps can access consumer financial data, open banking expands the variety of applications consumers can use for specific needs. For example, a financial services app could provide consumers with accessibility needs the means to access financial data or solutions quickly and easily. Such a consumer wouldn’t be limited to the (potentially) low-quality or limited app from their primary bank.
- Larger banks have to compete with smaller, newer banks, which results in innovation and better deals for consumers across the board. This also often translates to lower costs and better customer service.
- As consumers learn more about the financial industry, they’ll be better equipped to protect their personal and financial data from being stolen by bad actors like potential cyber criminals.
It’s no surprise that modern consumers are big fans of open banking. Certain surveys indicate that 56% of US citizens report that open banking is a must-have feature of the financial services they use.
How Open Banking Helps Financial Companies
While it’s true that open banking helps consumers, it also helps companies and landlords in various ways.
First and foremost, open banking increases consumers’ trust in their financial institutions. That’s a benefit for consumers, but it’s an advantage for banks and credit unions as well. Greater trust correlates to increased customer loyalty and repeat purchases, which is always beneficial in any industry.
Furthermore, banks and financial institutions that move toward open banking benefit from being able to connect their APIs to different third-party organizations. By weaving a complex, trustworthy ecosystem of different applications and platforms together, they can create a closed financial loop that their consumers remain within for long timeframes. That often leads to higher profits and greater customer retention.
In the long term, more financial organizations may broaden their services and the solutions they offer. By tying their brands to third parties, banks can offer their customers a much wider range of different services and products than before.
How does this help? It offers new things that banks and credit unions can sell to consumers. This, in turn, helps keep customers within the brand’s purchasing loop while giving organizations more chances to earn additional revenue.
That doesn’t even mention the potential cost savings that banks can enjoy. Through increased connectivity via open banking, clients can easily share data with financial advisors. This may accelerate the lending process, reduce the cost of running a business, and ensure the secure transfer of data from one platform to another.
Open Banking’s Effects on the Financial Industry in the Future
Given the above benefits, it’s clear that open banking will continue to make waves in the financial industry. Indeed, open banking is the future because:
- Legislative changes have made it a legal requirement in areas like Europe. Given the interconnectedness of the modern market, even organizations in the United States must abide by these rules if they hope to do international business.
- Consumers enjoy increased access to and control over their data via third parties. It’s unlikely they would ever agree to return to a more closed system where banks controlled their financial info exclusively, especially given the increased focus on consumer data privacy and information protection.
- Consumers also appreciate the digital-focused, agile results that open banking brings. In other words, customers are no longer satisfied with banks and financial institutions that only provide traditional retail experiences. They now demand free access to information and financial control from all of their financial services providers.
In summary, open banking will force more and more financial institutions to adopt its philosophies and approaches. This could result in a more open, free financial system and more personalized financial services offered to consumers.
For instance, financial organizations may offer personalized products or services to consumers based on their previous habits. In this way, consumer loyalty may grow toward individual institutions, leading to an even greater focus on data collection and analysis throughout the industry.
Open banking is the way of the future. People want to be able to access their finances and personal information wherever they go, and the demand for enhanced experiences is higher than ever. Financial institutions that want to stay modernized and attractive to their target audiences must continue to lean into open banking technologies and solutions going forward. That’s a great thing for consumers. But as explored above, it’s also a good development for the industry overall.