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Are Financial Institutions Ready for Open Banking: Challenges and Opportunities

December 22, 2023

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Opportunities and Challenges of Open Banking

APIs empower financial institutions to provide interoperable services, encouraging open banking. Are you ready for the open finance ecosystem?

Ecommerce players like Amazon, Uber, and Airbnb have disrupted customer experiences through intelligent use of customer data, raising the customer expectations bar significantly higher. Open banking is based on a similar model of enabling consented and secure data exchange among third party providers (TPP) and financial institutions. It is rooted in the idea that a customer’s data is only theirs and they should have the freedom to share it with their chosen third-party providers. But along with a goldmine of opportunities, open banking also poses challenges that the financial industry must overcome to fully reap its benefits.

Open Banking transactions crossed 11 million in July 2023, registering 9.3% growth over the previous month.

The open banking market is expected to grow at a CAGR of 20.5% between 2023 and 2032.

Opportunities Presented by Open Banking

Open banking has given rise to a pool of opportunities for FinTechs, banks, and customers.

Accelerated Innovation

In the fight to gain traction and boost customer acquisition, financial institutions strive to offer premium services to consumers. The competition drives innovation to build improved, customised, and more accessible financial products.

Elevated Customer Experiences

Since the customer has the power to seek “better” services and products at their preferred price points, customer satisfaction is the focal point of all business activity. Enhanced personalization and broader range of pick-and-choose services will considerably improve customer experience. And with more control and transparency, customers can make informed decisions and effectively manage their finances.

New Revenue Streams

Open banking opens up new streams of revenue generation for financial institutions and TPPs. Banks can develop new business models to monetize data assets and offer new age products by upgrading the banking infrastructure. FinTechs and TPPs gain access to data that they can use to tailor their offerings to specific customer needs.

Greater Financial Inclusion

Million of unbanked households may get an opportunity to access banking and financial services as the competition among open banking participants makes these services more affordable and reachable. Open banking has immense potential to bring the unbanked and underbanked populations into the financial mainstream with tailored offerings. Thus, open banking can play a pivotal role in improving financial inclusion.

Challenges of Adopting Open Banking

To capture the multitude of opportunities presented by open banking, the below challenges will need to be addressed.

Challenge 1: Transition in Mindset

Customers have long suffered due to the multiple pain-points of traditional banking. Open banking shifts the power from banks into the hands of the customer. Legacy banking is at a juncture to either adapt to changing customer preferences or let its relevance be obscured by aggressive competitors appearing at warp speed in the financial ecosystem. FinTechs are among the most significant TPPS to use customer data from banks to capitalize on opportunities presented by open banking. The most significant challenge for banks is a paradigm shift to perceiving open banking as an opportunity and not a threat to traditional banking. Technology transition is a close second. It is a step-by-step process to securely allow customers to choose to share their data while ensuring TPPs use it for intended purposes only.

Steps to Transition to Open Banking

Challenge 2: Complex Compliance Landscape

PSD2 (Payment Services Directive – Revised) significantly accelerated the transition to open banking in Europe. However, regions like the US have been much slower to adapt to this banking evolution. America took its first step in this direction in 2020, when the Consumer Financial Protection Bureau (CFPB) issued an Advanced Notice of Proposed Rulemaking to allow consumers to access their financial data.

Three years later, in October 2023, the CPFB has proposed Personal Financial Data Rights (PFDR) to protect consumers from excessive surveillance and allow them to walk away from poor services. It is aimed at fostering competition in the industry while giving more autonomy to consumers to control how their data is used. Consumers can now get rid of “junk fees” to access their own data and can legally share their data with their preferred TPPs.

Challenge 3: The Trade-Off Between Interoperability and Security

In the current age of globalization, regional siloes of regulations may make compliance complex and create friction in data sharing. Achieving a high degree of interoperability among distinct players, i.e., banking systems, financial institutions, lenders, and TPPs, is a time- and effort-intensive task.

While consumers have greater control, lack of awareness may introduce new vulnerabilities to the financial ecosystem and threaten customer data privacy. Additionally, maintaining the highest standards for sharing consumer data is paramount. Instilling trust in the Open Banking approach among customers is critical to its overall success.

Maximizing Opportunities and Overcoming Challenges

Whether it is a mindset shift or technology transition, the financial industry is extremely sensitive to even the slightest downtime. Banks, financial institutions, and TPPs need expertise in integrating open banking APIs to securely share data. Platform Banking and BaaS are two of the most adopted open banking facilities as of 2023. The collaborative endeavor requires establishing security standards, complying with protocols and privacy guidelines, and instilling confidence among users.

Globally, the value of open banking transactions is expected to grow over 500% to reach $330 billion in 2027, from $57 billion in 2023.

Source: Statista

Opus Technologies’ API services help banks, credit unions, FinTechs, and TPPs enable an API-rich framework to develop customer-centric solutions. Our comprehensive solutions help you identify core areas of improvement, facilitate technology adoption, and drive growth. Through 27+ years of deep experience in the digital payments domain, Opus has earned the trust of numerous partners worldwide, empowering them to elevate customer experience and offer unique and customized products and services.

Connect with our experts to learn how open banking can provide you an edge in the fiercely competitive financial landscape and deepen market penetration.

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