Consumers have spoken – they want a highly personalized digital experience from just about every business they interact with, including their financial institutions. They expect those interactions to be smooth and intuitive, and they expect their data to be secure and easy to access.
Online banking has been working towards those goals. Fintechs have been working towards those goals too. The exciting news? Open banking stands to help the industry take one giant leap forward by enabling everyone to work together much more easily. Called an industry disruptor by some, open banking is one of those concepts that our children may never live without1.
Open financial data via secure APIs
Open banking, also referred to as “open financial data,” provides third-party financial service providers open access to consumer banking, transaction, and other financial data from banks and non-bank financial institutions through their application programming interfaces (APIs). It is a big part of what allows the connectivity for living an Intelligent Financial Life.
Open banking is paving the way for consumers to:
- Track all of their transactions in one place, with instant notifications
- Breakdown their spending into categories and view budgeting history and/or progress
- Move funds easily between connected banks
- Split the bill with friends securely and frictionlessly
- Easily accept cashback offers
Yes, some of that functionality is available now, but industry experts expect it to get much better as secure APIs augment or replace legacy techniques like screen scraping. Screen scraping was once the only way for consumers to link their financial information to third-party financial platforms. Many financial institutions recognized the limits of screen scraping, including high traffic volumes on websites that led to heavy costs incurred to meet bandwidth requirements. Open banking provides a more effective and modern solution.
Open banking smooths consumer pathways
When we think about the ways open banking will transform the industry, the classic example is through account verification. Legacy screen scraping techniques and the use of Micro-deposits, or small amounts of money transferred into and out of your bank account, have commonly been used across the financial industry to link bank accounts together for easy transfers. For example, a consumer might want to set up autopayments for their new auto insurance policy. Traditionally, consumers have been presented with the choice of providing their credentials to their financial institution to achieve an instant setup of their account or going through a micro-deposit process that can take up to 48 hours to verify their bank account that will be used to facilitate their auto-insurance payments.
Open banking makes these legacy approaches obsolete.
Open banking keeps data secure
As institutions make consumers’ financial data available via standardized APIs, the industry will pivot away from legacy technologies that rely on screen scraping/credentials and migrate to improved connectivity through API’s/Tokens. Aggregators’ use of consumer credentials will be replaced. Instead, consumers will be securely authenticated without needing to share their login credentials with third parties.
Open banking enables access
In a broader sense, open banking is powerful because it may enable a lot more people to live Intelligent Financial Lives. According to the World Bank, approximately 1.7 billion people are unbanked or underbanked globally2. That means they may not have access to online banking services, cannot place orders or make payments online, and/or may not have a bank account. They likely do not have basic access to credit, like credit cards or simple loans, and they may rely primarily on cash.
In theory, if walking into a financial institution and opening an account was simple for this population, they would have already done it. This large group benefits from having alternative ways to access financial services, and technology plays a major role in that access.
Open banking will enable:
- Broader access to responsible credit, including credit cards and nano-loans
- Broader access to a wider variety of insurance products, including micro-insurance
- Participation in the global economy, by enabling users to securely move beyond cash-only transactions
- Access to affordable financial tools that address accounting and cash management for small businesses and/or budgeting and personal finances for individuals
All of this access may also encourage more informed financial behaviors. More connectivity may enable more financial wellness.
Open banking drives innovation
Intermediary steps like micro-payments aren’t just a headache for consumers. Developers are slowed down when they have to deal with them as well. Standardized APIs will enable app developers to create new and better ways for financial institutions to interact with their clients, touching more aspects of their clients’ lives and building stronger relationships. As open banking evolves across the globe, Envestnet Data & Analytics solutions will help financial institutions leverage these new connections, ensuring reliable, secure, private, and seamless API-based data access. Come visit us at Money2020 and click HERE to learn more.
1Chandana Asif, Tunde Olanrewaju, Hiro Sayama, and Ahalya Vijayasrinivasan, “Financial services unchained: The ongoing rise of open financial data,” McKinsey & Company, July 11, 2021, https://www.mckinsey.com/industries/financial-services/our-insights/financial-services-unchained-the-ongoing-rise-of-open-financial-data
2Lisa Gutu, “Open banking – a new stage in financial inclusion,” Fintechfutures.com, January 19, 2022, https://www.fintechfutures.com/2022/01/open-banking-a-new-stage-in-financial-inclusion/