What is Open Banking and Why Do Bank Clients Like It?

Open banking is a financial service that allows third parties to act as intermediaries in facilitating financial transactions between banks and clients via the API.

The latter refers to the Application Programming Interface (API) technology that makes banking practice more convenient for consumers, as the platform links consumer accounts with different financial institutions and service providers. Mainly because data will be accessible to third-party providers who will carry out full completion of financial transactions between clients, consumers and financial institutions when initiated online.

Whereas before, clients can make same-day, real-time transfers of money to another bank account only if such account is maintained in the same banking institution In open banking, through the API of a third party intermediary, the fund transfer can take effect in real time even if the recipient account is maintained in a banking institution that is different from the transferring bank.

Other Potential Advantages of Open Banking

Open Banking technology has been proven as very useful as it provides a new alternative especially in times of pandemic:

1.  With open banking, it shows potential that it can increase sources of revenue as customers who engage in online income-earning opportunities will have increased capabilities to perform online transactions through financial institutions.

2.  Open banking can also assist money lenders in determining the customer’s financial circumstances and risk levels. The open data related to applicant-borrowers makes the evaluation and decision-making processes easier for lenders when giving consumers practical and manageable loan or credit terms.

3.  As smaller banks engage in open banking, the bigger and well-known banks would be constrained to make their rates and services more competitive against newer and unfamiliar banks. As a result, larger banks would be pressured in providing better client service, use newer technologies to decrease banking costs being shifted to clients.

Technology Trends Driving The Finance Industry

New technologies have long defined the future of the banking sector. The biggest challenge is figuring out which of these developments will be most relevant to a particular company. We are at a crucial turning point. The observation of technology trends in the financial industry has never been more important. The strong competition from fintech companies and high-tech giants has increased consumer expectations within the industry. Since then, banks and credit unions have invested heavily in the use of new technologies to develop successful future strategies.

Technology trends in financial services

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Machine learning in the financial industry

Many banks are faced with the immense problem of keeping up with fintechs, as they can usually adapt to changes much faster and more agile than the big financial institutions. On the other hand, the established banks have more experience and data that they can use. This means that banks can reduce costs, deepen customer relationships and make compliance more efficient by using powerful AI and machine learning. Numerous financial institutions are now using machine learning to optimize all work processes (from risk analysis and fraud detection to marketing) in order to make data-driven decisions.

Cloud-based service models

The demand for cloud-based solutions is increasing. The near future promises cloud infrastructure as a standard web server environment and as a go-to environment for companies, also to accelerate digitalization in the banking sector. Cloud-based service models offer a realistic way to increase your own value creation potential and reduce complexity and costs. Banks are already using Amazon Web Services and other well-known cloud providers for efficient email management, human resources, software development and testing, customer relationship management and other tasks. Even if these are not directly related to the core business of banks, many shareholders assume that it will not be too long before almost all financial institutions will use the cloud for their basic services.

Open Banking

The concept of open banking for financial services is based on several principles:

  • Introduction of open APIs (Application Programming Interfaces) with which external developers can develop applications and services for financial institutions
  • Faster, simpler and more efficient financial services for customers
  • The implementation of these principles through the application of open source technologies
  • Data sharing is usually done through an API, an intelligent connection that enables the data flow between systems.

APIs can implement the formatting of the data derived from a software application in order to insert it unchanged into the next application.

What does this mean for the consumer? Open banking allows account holders to switch from one provider to another much easier to get the best conditions.

Intelligent anti-fraud solutions

The challenges of cyber security have become an everyday struggle for banks. Research shows a clear increase in hacked and publicly available data coming from common sources such as mobile devices and IoT devices.

Cyber attacks are nothing new to banks. An increase in attacks suggests that conventional solutions are no longer sufficient. Analysis technologies are becoming more and more precise in identifying areas and activities where there is an increased risk. Banks that succeed in detecting fraudulent transactions or cyber attacks will also be able to build more trusting relationships with their customers in the long term.

Voice Banking

Intelligent voice interfaces enable real-time communication and interaction between human users and a virtual assistant. This makes it easier to use hands-free devices and to respond quickly to questions and problems. Market leaders in private and mobile consumption include Siri, Cortana, Alexa and Google Assistant. Voice banking in particular is a perfect solution for older and restricted customers to avoid complications on the way to a local bank. Top fintech companies are increasingly developing APIs that voice assistants can skillfully integrate into banking systems to drive efficient voice banking.

Digital Banking

The digital bank is no longer a vision of the future. More and more financial institutions are replacing their physical branches with purely digital offers, thus meeting the requirements for new customer communication. This must be fast, interactive, personal and available everywhere. This turns into a risk that traditional banks have successfully relied on for decades. Financial institutions should therefore also develop efficient startup relationship management programs in order to use the technical know-how of fintechs for the development of digital solutions.

Finance has created more innovative products and services than ever before. In order to keep up with the agile pace and discover competitive advantages at an early stage, banks should continuously monitor their corporate environment and examine them for risks and opportunities.