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InsideNOW

Open Banking: Understanding the fundamentals before unlocking the potential

Innovation, revolution or hype? Open Banking has recently been associated with so many words. Yet one thing is undeniable; Open Banking is disruptive and is poised to take the financial world by storm. However, to be able to unlock its full potential, it is of utmost importance that the main pillars, which would shape the success of Open Banking, are well established. By being well established, this would pave the way for banks, customers and SMEs to gain a better understanding of what Open Banking is all about and ultimately make the most of its benefits.

Authors

Authors

Pascal Eber - [Sponsoring] Partner - Consulting Banking, Insurance and non-FSI - Deloitte

Alexandre Havard - Director - Consulting Banking, Insurance and non-FSI - Deloitte

Xavier Turquin - Senior Manager - Consulting Banking, Insurance and non-FSI - Deloitte

Avisen Mootealloo - Analyst - Consulting Banking, Insurance and non-FSI - Deloitte

Published on 9 July 2020

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Innovation in the banking industry has been, and should always be, at the forefront of banks’ core strategies. One such example is Open Banking, which has quickly become a buzzword in the financial world. Many banks and FinTechs in the EU and the UK have already embarked on a project which involves Open Banking or have Open Banking initiatives in their pipelines.

The introduction of Open Banking is expected to cause significant transformations in the financial services' landscape around the world. To succeed, it is important for all stakeholders to clearly understand Open Banking and to take appropriate measures, all of which will set the stage for a successful Open Banking ecosystem.

WHAT IS OPEN BANKING?

Open Banking is still at a nascent stage. Its framework and definition vary across jurisdictions mainly because of the different approaches adopted by authorities. The essence of Open Banking however relates to the secure sharing of bank-held customers’ authorized data to third-parties. Depending on the model being adopted, these third-party entities may be regulated and/or supervised by a relevant authority.

The overall concept of Open Banking originated from the objectives of providing innovative and value-added services while at the same time ensuring that security factors are taken into consideration. The second Payment Services Directive (PSD2) is only deemed to be a stepping stone for Open Banking in Europe. Open Banking is in fact a much wider financial services initiative, which will play an integral part in defining the future of banking in the digital era.

HOW DO WE CREATE AN EFFECTIVE OPEN BANKING FRAMEWORK?

It is fundamental for a successful Open Banking framework to be based on some cornerstones. This would allow financial institutions to efficiently leverage the untapped opportunities of Open Banking in order to provide innovative, secure and transparent solutions to customers.

When would it be the right time to embark on an Open Banking journey?

The time is now! Don't think twice, at least start exploring the opportunities of Open Banking!

WHY IS OPEN BANKING NEEDED AND WHO SHOULD EMBRACE IT?

Open Banking presents untold opportunities for banks to re-invent some key aspects of banking and has the huge potential of becoming a powerful lever for growth in the industry.

Furthermore, Open Banking can take a leading role in improving financial inclusion globally by providing a broader range of value-added services to a wider audience (See Figure 1).

OPEN BANKING PRESENTS SIGNIFICANT OPPORTUNITIES FOR BANKS TO EXPLOIT

The banking industry should consider Open Banking as a movement that could significantly improve the banking landscape in the years to come. It is comprehensible for some banks to show reluctance regarding the real purpose of Open Banking, especially when competitors are gaining access to their customers’ data. However, these changes could in fact turn out to be a win-win value enhancing opportunity for banks. If they succeed at using customers’ data efficiently and develop new strategies, they will ultimately be able to increase their dominance in some areas like bancassurance , private banking, cash management or credit offering. Banks will therefore need to adapt in order to overcome upcoming challenges.

When it comes to digital transformation strategy, it is interesting to note that some large banks have already engaged in partnerships with FinTechs. This will undoubtedly allow them to get a head start over their competitors.

One example relates to BNP Paribas, which announced in January 2020 that its Italian retail network reached an agreement with an Open Banking platform, named Tink. BNP Paribas will be able to implement Tink’s solutions for account aggregation, payment initiation and personal finance management. This strategy could turn out to be beneficial for all the parties involved. For instance, FinTechs such as Tink would be able to expand their business reach, banks would be to generate new revenue streams and customers would benefit from a larger variety of innovative services.

Other banks have also continuously enhanced their own digital capabilities. HSBC UK was one of the pioneer banks to release an Open Banking app, Connected Money. As such, customers were able to see all their accounts linked in a single app. HSBC, later announced that it would merge the main features of Connected Money into its main mobile banking app.

CONSUMER’S AND SME’S ADOPTION: THE SOONER THE BETTER

The data available from Google Trends has shown that Open Banking has not yet caught the attention of the public as compared to other emerging trends such as blockchain, Big Data or FinTech. Such statistics are not surprising because end-consumers are usually not aware of the banking technical environment. Instead, they are more concerned with the end-products or the actual services being offered to them (See Figure 2).

Nevertheless, if adopted on a large scale, Open Banking could present great opportunities for consumers. They could benefit from a larger choice of new innovative and value-added services like account and financial data aggregator, instant product comparison, streamlined lending and payments as well as credit scoring. As such, Open Banking will place consumers in a commanding position as the latter would be provided with more efficient tools to better manage their financial assets.

Similarly, Open Banking has not yet taken hold of small business owners’ interests. It is, however, expected that the situation will not remain this way for long, due to the business flair of entrepreneurs. With Open Banking, SMEs will have a wider variety of choice and understanding to manage their business. Rather than having limited choices offered only by traditional financial institutions, SMEs will be able to explore new tailored products proposed by new providers. One such example is the Coconut accounting app, which has been designed for small firms and self-employed people.

Conclusion

The advent of Open Banking comes at an opportune moment for banks. It is expected to bring a breath of fresh air in the banking industry especially at a time when consumers’ demand is increasingly leaning towards tech-focused services. However, given that Open Banking is still at an early stage, it is therefore crucial to start laying a firm foundation. The sooner financial institutions realize the benefits of embracing Open Banking, the sooner they can unlock its full potential.

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