Delivering on the potential of open finance

Not so long ago, “open banking” seemed unimaginable. With the increase of new digital technologies, the level of cyber risk has also evolved. So financial data, always considered highly sensitive, has become more confidential – certainly not to share.

But things have changed. With the ever-increasing rise of financial technology, banking applications, online trading platforms, and digital currencies, consumers have realized that there is a huge benefit in
safely Share information with trusted third parties. It can enable us to handle our finances more easily, make our money work harder, and support various new financial services – for the benefit of our entire community.

Although this revolution is promising, open banking is at great risk of slowing down. Now, four years after its implementation, it’s time to question whether the benefits of this are really understood, and how the financial services industry can mitigate any barriers to adoption.

Sowing the seeds of open banking

The pandemic has put enormous pressure on the revenues of financial institutions. But even before Covid, the traditional banking sector was in trouble. The challenges and limitations of legacy systems have been exposed by the emergence of alternative financial service providers, including the first competing digital banks. In the face of their smarter counterparts, major banks have found themselves unable to provide the data capabilities and agility required to make open banking work.

However, the industry can adapt quickly when it wants to, as evidenced by the speed with which systems have been upgraded and updated. Embedded financing – where banks allow their platforms to be used within third-party experiences – enables organizations to tap into new and larger markets, and unlock new sources of revenue. For example, by 2025, Gartner predicts that half of the first-tier banks will launch a banking-as-a-service offering.

Aside from the new capabilities, Open Banking is just as important as its ability to improve existing services and processes, reduce costs, and deliver an enhanced customer experience that enhances retention and return. Having access to the full financial picture of clients enables banks to significantly simplify the process of underwriting loans, make operations more efficient across the board, and offer more targeted and cost-effective marketing.

Open banking to everyone

Previously, old technology was a stumbling block to realizing the advantages of open banking. But while the industry has made impressive progress in adopting new platforms and technologies, there are still significant barriers to broad application of open banking.

Notably, the new digital systems only provide the basis for open banking. To share data securely and reliably between parties, the financial services industry also needs robust data sharing standards and protocols — as well as buying from customers.

This has been particularly difficult due to the various regulations across jurisdictions, which have resulted in a patchwork of standards across the world. PSD2 may have laid the foundation for the open banking revolution in Europe, but in the United States, such standards do not yet exist. Even in Europe, PSD2 only opens some products and transactions; Mortgages – for most people, their biggest and most important financial product – are outside the purview of regulations.

There are also still significant technical hurdles. Data is more securely shared in open finance applications via APIs that pass data using cryptographic tokens, but we are still far from standardizing coding protocols to remove vulnerabilities that hackers can exploit.

The standards that consumers will use to allow access to their data, including what is shared and with whom, are still under development. As these standards evolve, some may be excluded from the next generation of financial services because some are willing and able to share their information and some are not. In fact, those who probably benefit most from open banking – the unbanked or underbanked population who may lack formal credit history or previous banking relationships – may be less able to share data.

The lack of education in and around open banking is one of the biggest challenges banks face at the moment. To see success and growth in usage, banks need to sell the benefits of data sharing, and clearly articulate how much they outweigh the risks. A clear presentation of how banks protect customer data is critical, especially for those who are unbanked and under-banked. Fintech has already shown that it is possible to provide basic banking services to those who do not have established credit or banking relationships. Now, the traditional industry must follow suit.

When it comes to regulation, progress is being made. For example, the Financial Data Exchange (FDX), the body that works on open banking protocols in the US and Canada, is working on an application programming interface (API) project that includes nearly 600 data points that customers can share with third parties. These standards are essential for the development of open banking services, but in the end, the banks themselves have the real responsibility to secure the data of their customers. In fact, consumers still trust their bank with their data to a much greater extent than big tech or fintech companies.

Soon, we’ll ask ourselves how we’ve ever been without open funding to begin with as we witness the momentum of building data sharing. As the industry works to overcome barriers to adoption, its potential to deliver huge benefits to all of us will only become clearer.

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