Bringing the open banking promise – and how to get there – into sharper focus

The practical notion of “open banking” is generally regarded as the exchange of data and services between financial institutions and third-party providers for the purpose of enhancing the capabilities and experiences of end-users. Ultimately, open banking gives customers more control over their data and, as a result, greater control over their finances, including making payments.

Not to be confused with PSD2 (the revised Payment Services Directive) – a strictly European regulation designed to secure account payments and protect customers – open banking is a global movement that extends to all types of accounts and services. And it’s growing exponentially.

In 2020, more than 24 million people worldwide engaged open banking services, a figure that, according to estimates, is expected to mushroom to 130 million users by 2024, fueled in part by a burgeoning population of third-party payment providers.

For consumers, the value of open banking hinges on their willingness to share their data. The sheer volume of payment transactions suggests people are all in on sharing their data to gain the advantages of open banking.

A clearer picture of the open banking promise

Besides enjoying more ways of managing money to realize their financial goals, open banking adopters have a clearer picture of their finances, with insights on spending habits, budget tracking, and other metrics keeping them on a straight path.

Open banking can speed the customer journey and simplify procedures that require end-users to provide a great deal of personal information, such as applying for a loan (more on this in a minute).

And the benefits are not just one-sided. With end-users’ consent, banks can glean a detailed understanding of their customers’ financial proclivities and use that data to provide more personalized services, strengthening customer loyalty and brand integrity. Everybody wins.

Looking beyond secure digital payment

Open banking is about more than helping end-users initiate and secure payments through their accounts. This digital environment reduces the carbon footprint of both financial institutions and consumers and offers a secure venue for receiving financial coaching.

But one domain where open banking is experiencing lots of traction is in digital lending.

Lenders, banks, and related services recognize the rewards of truly understanding their customers. They can provide better offers and reduce risk and be ready with real-time answers that enhance their ability to do both.

Time is money. People need to procure capital now – not in two weeks or three months. Requiring customers to fill out reams of documentation is simply not compatible with today’s demands for real-time response to requests and speedy decision making.

With end-user consent, open banking gives financial firms direct access to consumer accounts so they can analyze data patterns in fractions of a second.

The ability to determine the borrowing power – and score the levels of risk – associated with a potential client at light speed is not only key to getting funds into the hands of borrowers so they can change the world, but also critical to the financial institution’s competitiveness in an industry where milliseconds can mean millions of dollars.

Embedded finance is rooted in the right platform

Banks and financial institutions need an open banking platform – along with support and expertise – that will give them the tools to meet the new normal of real-time lending assessments and decision-making.

An open API management platform enables banks to embrace the world of embedded finance, where a digital ecosystem of financial teams and payment providers combine services to meet client needs at every step of the buyers’ journey.

Open banking powered by an open API management platform, like Axway’s Amplify, helps more than 100 banks and lenders across Europe to provide these types of services.

The need is real. Digital loans in Germany currently represent 75 percent of all applicants. In Sweden, it’s 50 percent.

The practicalities of sharing data, with the consumer’s consent, and entering into a secure borrowing process with just one click – instead of signing stacks of documents – are gaining a foothold among government authorities in Europe and elsewhere.

Lenders can also adopt a “buy now, pay later” model with open banking that provides access to real-time scoring and offers a way to develop and extend innovative services, especially those that leverage persistent contact with borrowers.

Continually updating data generates an evolving, day-to-day picture of client standing – insight that can form the basis for proactively notifying clients of greater borrowing power or new capabilities through third-party payment and service providers.

The full potential of open banking is in sight

These are just some of the ways open banking is taking the complexity out of digital payment services and financial management and putting greater financial control in the hands of clients.

The full scope of possibilities of embedded finance – where consumers, enterprises, and banks identify and exploit opportunities together along the buyer journey – continue to come into sharper focus.

Meanwhile, it’s going to take the right open banking platform to help everyone reach the highest resolutions possible.

Start there.

These comments are adapted from a panel discussion at Sopra Banking Software Summit featuring Mung Ki Woo, Strategy & Management Consultant at 2KD, Daniel Lê, Principal Presales Architect at Axway, Jerome Albus Director France & Benelux at Tink, Paola Diallo, Product Manager – Open Banking at Sopra Banking Software, and Abdellah Messaoudi, Member of Board in charge of services and partners at Eurafric Information (Bank of Africa).

In the next installment of this series, we share an open banking example from Indonesia where, with the help of APIs, a bank was able to help give loans to people who didn’t even have bank accounts. Learn how the organization succeeded in analyzing spending habits to bring down interest rates and make loans more accessible.