The rise of open banking is nothing short of phenomenal. With transactions in the domain exceeding $57 bn in 2023, PwC research anticipates open banking to become a strategic area of investment for retail banks by 2025.
The transformative potential of open banking is powered by connected networks of banks, developers, fintech firms, and partners who come together to offer fast, convenient, and flexible services to target customers.
Open banking also plays a significant role in reducing the costs of transactions by enabling disintermediation to the best extent possible. No wonder, the appeal of the open banking ecosystem is growing exponentially by the day.
Open Banking: How Does it Work?
At the heart of the open banking phenomenon are application processing interfaces (APIs) which help in seamlessly sharing data between financial system stakeholders. This real-time information sharing enables firms to offer tailored financial products and deliver superior customer experiences while exploring new avenues of opportunities beyond the conventional segments.
To make a shift to an open banking system, organisations need to upgrade their technology infrastructure, widen the scope of connected devices, and create centralised data banks to allow seamless exchange of information on a real-time basis. The upgradation might come across as a resource-intensive process though given the transformational benefits it brings to the table, the investment done is completely worth it.
Open Banking Evolution: Enabling Factors
a) Technology Evolution: The rise of open banking has been catalysed by the fast advancements in the technological landscape. From widening connectivity to emerging smart devices and advancing APIs, the growth of open banking has been put into overdrive mode by the emergence of new-age technologies. The coming together of all these innovations has boosted open banking and as a result, consumers are today enjoying personalised, relevant, and superior experiences in the banking sector.
b) Customer Centricity: One of the crucial reasons behind the popularity of open banking is its unwavering focus on delivering superior value to customers. This customer-centricity enables firms to deliver customised solutions, fast processing, and prompt services to the target audiences. Open banking has also demonstrated its utility in reducing costs and transaction times by offering attractive avenues for disintermediation. Further, the open banking system is helping the financial ecosystem to become more competent by delivering superior results on important parameters of performance and customer satisfaction.
c) Emerging Opportunities: Open banking is proving crucially instrumental in helping stakeholders expand beyond the conventional boundaries of banking and financial services. This exploration is also catalysing innovations and collaborations in the sector, thereby resulting in new revenue streams, market expansion, and widening of financial operations beyond the conventional territories and operational boundaries.
d) Transforming Corporate: The emergence of open banking has highlighted the importance of a platform-based approach to deliver personalised services to the target market. These platforms enable faster processing, quick sharing, and rapid scaling to take the operational excellence of financial firms to the next level.
e) API-based Revolution: APIs are the lifeblood of communication between different IT systems and hence, their role in making open banking operations successful is critically important. APIs are inherently flexible which means these can be effectively used to scale operations, facilitate communication, and foster collaboration among stakeholders throughout the financial ecosystem.
f) Open Finance: As a natural extension of open banking, open finance offers better prospects for financial inclusion, offering customised solutions, and delivering personised services to the masses. The relevance of open finance is specifically crucial in bringing more transparency as it enables the seamless sharing of data between stakeholders of the financial ecosystem. This data sharing also enables firms to offer personalised services, catalyse innovation, and lead to closer collaboration between players in the finance and banking industry.
g) Deposit Solutions: Counted among the significant features, an open banking system facilitates hassle-free deposit services while allowing firms to even offer third-party services to their customers. Take, for instance, the ZinsMarkt which is proving extremely beneficial in boosting the prospects of deposit solutions. The white-label solution is being used by Deutsche Bank to offer deposit solutions of other banks to its customers. By enabling such a collaborative approach, deposit solutions are emerging as the next avenue of growth in the open banking system.
Open Bank Ecosystem: Important Stakeholders
While retail and corporate clients are counted among the crucial stakeholders in open banking, the significance of banks, fintech firms, non-banking partners, and intermediaries is equally crucial in expanding the footprints of the ecosystem. Further, the role of policymakers, administrators, and regulators is equally significant in spreading prospects of an open banking ecosystem far and wide. In addition, global efforts to spur the entrepreneurial ecosystem are also paving the way for the emergence of more competitive solutions in the domain.
Open Banking System: Driving Forces
The evolving preferences of customers are among the crucial forces that are driving the adoption of an open banking system globally. This coupled with the growing purchasing power is helping the segment expand at an exponential pace. The role of technology upgrades couldn’t be underestimated either. For example, the upgradation of payment service directive 2 (PSD2) to payment service directive 3 (PSD3) has significantly helped in enhancing innovations and customer centricity in the banking sector. Similarly, the emergence of separate platforms for retail customers (client banks) and product categories (product banks) is also facilitating the evolution of the open banking system.
Expanding Use Cases
Thanks to the growing number of use cases, open banking today is making a tangible difference to the lives of millions around the world. The leading global banks including Deutsche Bank, Oney Bank, and MünchenerHyp have successfully demonstrated the versatility of open banking and these success stories are now inspiring other stakeholders to integrate open banking solutions into their product and service portfolios.
Conclusion
The open banking revolution has just started and its transformative impacts are already beginning to appear on the horizon. The philosophy is catalysing collaborations, fueling innovations, and helping the industry develop personalised solutions for their target markets. Summarily, open banking is emerging as a game-changer philosophy and by offering all-encompassing benefits for all stakeholders, it’s proving a panacea for several issues that continue to plague the banking sector for a long time.
Article Contributed By: Rohit Yadava, Chief Operating Officer at MSys Technologies