Open banking standards have changed significantly globally and they’re continuously improving. During the 3rd quarter of 2020, there are more than 400 open banking platforms globally. These FinTechs and financial institutions have released over 2,800 open API products for improving financial services. The embrace of open banking APIs has shifted the way customers interact with their financial institutions, and it has also created new partnership opportunities between banks and FinTechs.
However, this trend brings new challenges for the customers and banks and they have to be addressed for continuous effective use. In this guide, we will examine everything open banking APIs have to offer for businesses and customers, outlines the challenges for financial institutions building an open banking API platform, and how API can help in accelerating growth for businesses.
Several countries are adopting open banking since the rise of digital banking infrastructure. Out of all the countries in the race for becoming Open Banking leader, Europe has emerged victorious. The introduction of PSD2 (2013) pushed the use of open banking APIs in the market. The PSD2 directive operates around one major goal, i.e; to streamline the digital banking services offered using open banking APIs. While most of the efforts in the open banking landscape are focused on these 3 services, some financial institutions have started to expand beyond these minimal requirements with additional digital financial services.
The Open Banking Playbook published by the Monetary Authority of Singapore is what suggested the start of Open banking regulation in Singapore. While it doesn’t offer standardization, it does offer common and effective APIs that can streamline the process.
The Australian Open Banking initiative got the initial traction after focusing on data sharing rights via Consumer Data Right (CDR). Using CDR as the stepping stone, the Big Four banks (CommBank, NAB, Westpac, and ANZ) were asked to deliver the first phase of open banking by 1 July 2020, which includes debit and credit card, deposit, and transaction data. Open banking standards regarding mortgage and personal loans were asked to be built by 1 November 2020. All the banks other than the top 4 banks are required to provide open banking services by July 2021. There’s no guidelines as to the type of services that need to be offered.
Other countries like the US, Japan, and Canada haven’t shown many initiatives in their approach towards open banking infrastructure. They’ve even issued non-binding guidelines, thus providing industry stakeholders to pave the way forward. In a brief, the Federal Reserve Bank of Boston said that the US was the least likely option among global governments to embrace Open Banking regulations, especially because it is more complex and the bank regulatory system is fragmented. However, several financial institutions and FinTechs are the momentum builder for the open banking landscape in the U.S., as they seek enhanced and expanded digital services for customers. Online document verification APIs and proof of address verification APIs, and online KYC verification APIs can significantly reduce the time and resources spent on manual KYC verification and enhance customer experience.
Impact of Open Banking APIs on Financial Industry
1. Providing Customers with Open Banking APIs
Almost all consumer interactions with a bank involve their savings account. Customers have been able to quickly and easily obtain data using mobile apps or websites. Partners can request permission to access these account details to build and improve current finance applications for budgeting, reporting, and reconciliation.
PSD2 has allowed European customers to get unsecured loans to address their immediate needs instead of waiting around for weeks for paperwork to be completed. The time and resources consumed in filling out the paperwork can be used to complete some other task by using Open Banking APIs. Customers don’t really understand how open banking works, so their interest in the technology is low.
2. Open Banking APIs Offer New Partnerships
One of the biggest challenges of open banking is that financial institutions become commoditized, brands may lose valuable relationships with customers as they get better chances at better services. This is why some of the biggest financial institutions are moving beyond the normal needed by these standards to provide better services for consumers. This sudden change in mindset gives birth to strategic partnerships between banks and FinTechs.
Financial Institutions are finding ways to get in touch with the unbanked and underbanked by partnering with FinTechs that specialize in digital services. Such partnerships can be used to help banks simplify the processes like customer onboarding, lending, digital payments and so much more. This allows the banks to stay relevant in the digitally growing environment and allows FinTechs to reach the huge group and comply with challenging regulations.
3. Real-Time Decision Making with Open Banking APIs
Market analysis based on open banking APIs suggests that they can assist in driving business decisions in real-time and figure out potential changes in market trends. In addition, fraud identification is regularly fueled utilizing a mix of APIs and constant information streams.