Open banking can be seen as a buzzword in the banking and payments industries.
It promises new products and innovations that everyone can benefit from – banks, FinTechs, consumers and traders. But open banking is more than a product or a service; it is a choice (regulatory or dictated by the market) that allows a whole new financial ecosystem to flourish.
The list below shows that the use of open banking goes beyond payments, and many businesses can benefit from having access to a wealth of consumer financial data. For more information on what databases should share or how that data is accessed, read our previous entries in this open banking series.
Personal finance apps can cover a wide range of services, ranging from budgeting apps, market comparison apps, debt counseling apps, and more. These types of apps were part of the initial wave of innovation, as third-party providers (TPPs) could access consumer data from their banks and deliver personalized offers to their customers. Open banking is helping to improve the relevance of these services for consumers as more and more data is collected.
Ready for consumption
Banks are the main beneficiaries of open banking when it comes to lending, as they are generally not required to share loan or credit data with TPPs. Open banking provides banks with tools to create credit profiles of current and potential customers in order to accept or reject cases more quickly. In addition, it reduces administrative costs as more and more data is processed automatically, and in some cases even machine learning processes can handle the ever-increasing data.
However, a new beneficiary of open banking has just entered the field: companies buy now, pay later (BNPL). While BNPL could be placed between payments and consumer loans, without access to consumer financial data and lightning-fast credit checks, BNPL would not be possible.
Like consumer loans, open banking offers financial institutions (FIs) more information about potential customers and faster application processes. It also offers reduced administrative costs as fewer steps are required to complete and review applications. For mortgage brokers, open banking also gives them the ability to match lenders and buyers more easily as they have access to more information on both parties.
Insurance companies can now offer more personalized offers to customers. Access to consumer data can provide a better picture of customer behavior and financial situation. This allows the business to adjust its premium or offer rewards to customers. However, insurance companies stand to benefit even more from the second wave of open banking innovations. If businesses could access more customer data, such as location or behavior patterns, as may be the case in the future, it would allow them to further tailor offers for each individual risk profile.
Wealth management and investment
If personal finance apps were part of the first wave of open banking innovations, wealth management and investment platforms are likely part of a second wave. Over the past two years there has been a significant increase, especially in investment applications.
Open banking allows for easy investor onboarding by removing unnecessary checks or manually uploading documents as these apps have access to financial data and credit checks. It also offers apps and consumers a simple and secure way to transfer funds from bank accounts to platforms.
Cryptocurrency and digital assets
Investing in cryptocurrency and digital assets isn’t exactly open banking, but how could crypto be mainstream without consumer identification and fiat money transfers? This is an example of how different technology and traditional payment companies can benefit from open banking innovations, namely integration automation, know your customer (KYC) processes, transaction monitoring, the fight against money laundering (AML) and payments.
Retailers, Utilities, Telcos, Gaming
In most of the examples mentioned above, the beneficiaries are financial services companies. However, more and more companies in other sectors are also benefiting from these advantages. For example, retailers can see higher trade volumes thanks to BNPL and new checkout / checkout methods, and game companies can offer instant consumer payouts and faster onboarding processes. Alternatively, utilities and telecommunications companies can benefit from quick credit checks to avoid bad customers.
Open banking allows TPPs to access payment account data. So the next use cases are likely to be related to payments, like in-app payments or instant payments, and most businesses involved in e-commerce could benefit from that. However, as the legal mandate to share data expands (or market demands) expand, it may include other sectors, such as healthcare, social media, or mobile ecosystems.