Open banking – Data, IDs, and Opportunities

When it comes to how consumers use and move money, open banking has spurred a new wave of fintech innovation that brings financial transparency, improved services, and personalized products to customers. But there are hurdles to overcome, including harmonizing compliance standards and KYC processes.

The fundamentals of banking have essentially stayed the same for decades - payments in, payments out, borrowing, lending, etc., etc. There have been innovations in the way these transactions take place - innovations like online banking, ATMs, contactless payments, and banking apps, but the introduction and adoption of open banking has the power to be transformative.

When it comes to how people use and move money, opening access to critical banking data has spurred a new wave of fintechs, bringing better financial transparency, improved services, and multiple other benefits to customers.There are still issues to resolve such as global compliance and unified KYC frameworks, but nevertheless, the opportunities for all parties – banks, fintechs, and consumers – are real.

What is open banking?

Open banking is an innovative practice where banks share consumer data in standardized and secure forms with authorized third-party organizations, such as fintechs. Banks typically hold a significant record of customer transactions ranging from earnings and expenditures to loans and mortgages. Open banking allows third-parties to access that rich data source from banks through application programming interfaces (APIs) to build new and creative financial financial products that are then offered to consumers.

The concept of open banking began in 1980 when a German bank ran a successful experiment in online banking. Those original concepts have been refined overtime, with the most recent update being implementation of the Payment Services Directive (PSD2) in 2018, which further enabled open banking. PSD2 focused on building a more efficient and well-integrated European payment market while ensuring equal opportunities for third-party service providers.

NB - It's worth noting, all the financial transaction data necessary for open banking can only be shared with a user's full consent.

How has open banking changed the financial services market?

Open banking allows customers to benefit from a broader range of financial services products. It offers better access to personalized and customized financial products. It has led to an increase in the number of fintech firms emerging worldwide, while banks and other established financial institutions continue to find new use cases for open banking. Arguably, all these developments significantly benefit consumers by offering them more personalization and greater choice.

Account aggregation

All parties, including banks, fintech firms and account owners, will benefit from increased data visibility. For example, it allows consumers to view all their financial products and accounts in one interface, offering them a comprehensive financial overview and helping providers work out the most suitable products for them.

Combining data from multiple sources can help providers create a deeper understanding of every customer’s needs by leveraging data to build more personalized products.

Insurance opportunities

Banks and third-party providers can offer personalized insurance products through mobile and online channels using data available through open banking.The spending insights from the aggregated financial data can ensure consumers get the most suitable insurance coverage.

Identity verification

Fintechs can use open banking data for identity verification to make better, faster decisions. Compliance processes are expedited and credit, for instance, can be made more accessible more quickly. The know your customer or KYC process that verifies a customer is who they claim to be can help fintechs build a faster picture of risk associated with an individual, which then informs onboarding decisions or upsell opportunities.

What are the complications of open banking?

There have been a few integration challenges as traditional banks strive to adopt new open banking systems. Some of the main issues include:

• Poor API reliability: The APIs created by banks have failed to work with third-party financial apps, which undercuts the benefits of access to bank data

• Lack of an identity management framework: There is no universal framework for KYC, identity management, and identity verification. This can make it hard for developers to track consumers and their account data, and in turn present a fraud or financial crime risk

• Lack of sufficient compliance standards: While Europe and the UK have introduced clear open banking compliance standards, other countries, including the US, have not regulated or standardized open banking

• Security challenges: Data security remains a crucial challenge for open banking integration. Banks and fintech developers must continue to ensure financial apps are secure while minimizing the risk of any vulnerabilities

What is the future of open banking?

The future of open banking looks bright, especially if all parties concerned can fully adopt the data-sharing integration necessary for success. Fintechs could even become the new giants of the financial services sector through increased provision of services to underserved consumers and access to customized or personalized services.

Another future scenario is that merchants help banks and fintechs capitalize on open banking data to spur a retail banking revolution. Merchants, shopkeepers, and traders can use targeted marketing and loyalty schemes to boost margins, improve sales, and increase overall performance while providing fully integrated financial products and services to customers.

Open banking has immense potential to improve financial services’ revenue streams and customer reach, but only with full adoption, consent from all parties –including customers themselves – and unification around identity verification and compliance standards.

Consumer-led financial services

A transition to open banking means a transition to more consumer-led financial services and products. Open banking has, so far, positively impacted financial services by allowing consumer success to more sophisticated products, streamlined lending, and new payment methods.

Sharing financial data through open banking allows for the creation of new and innovative financial services and almost guarantees they can be built more cost effectively and at speed.  And even with a lack of unified regulation and considering data-sharing challenges, the future of open banking is bright. Open banking is poised for success which will benefit all parties from banks to fintechs to consumers.

Get in touch

PassFort, a Moody’s Analytics company, enables financial services providers to automate customer onboarding and perpetual KYC processes.

We automate a series of compliance checks, integrated with leading data providers, to verify customers and their identities. PassFort also comes with a full case management system, providing a single view of customer data that enables you to make better risk-based decisions about who you work with.

Please get in touch to talk to us about automating your KYC processes – we would love to hear from you.