Open Banking: what it is and how it will change the financial market

The operating model of the banking system is undergoing rapid changes in recent years. Advances in technology have enabled financial institutions to adopt more flexible methods and more innovative means of operation.

This is the case, for example, of digital banks and fintechs. These companies rely on the advantages of new technologies to maintain operations focused on digital environments and flexible plans.

In addition, there is the idea of ‚Äč‚ÄčOpen Banking, which is being applied in all institutions looking for ways to create more innovative and effective services. Learn more about this concept!

What is Open Banking?

Financial institutions are known to have a working model in which all services and applications are created and managed internally. This model gives the business total control over every aspect of its operations and how each activity will be performed. We created an infographic that summarizes what is open banking, the benefits and challenge for the Institutions: click here and download for free!
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owever, operating costs are high, as the company will have to invest directly in a series of routines and in the maintenance of specialized teams.

Open Banking is a business model that works in a different way. The company now has a greater focus on its critical processes, releasing interfaces based on APIs (Application Programming Interface) so that other companies can create applications that add value to business services.

Thus, banks can focus on their primary service while developing applications or integrations becomes the responsibility of a server community.

How does this concept work?

Open Banking is a recent concept and is gaining momentum in many countries, especially in Europe. In summary, the main idea is to enable third parties to develop applications around financial institutions. These, in turn, would have to open their APIs - a set of programming patterns that allow building applications.

This enables, for example, an expense control application to connect directly to the bank's systems. It can capture user spend automatically, as well as the income from your investments and other services provided by the institutions in your APIs.

For this to be possible, the financial institution must create a set of open (or restricted to selected partners) APIs and well documented. This will create a community around the financial institution, with teams of developers expanding the possibilities of business services and making customers more loyal.

What is the impact of Open Banking on the business scenario?

Since the creation of The Open Banking Working Group in 2015, Open Banking has become a more solid and standardized concept. This initiative, which unites banking institutions, Fintechs and other companies in the financial sector, has as main objective to integrate initiatives to open up this market, giving more agility and uniformity to the procedures adopted by banks.

What are the benefits of Open Banking?

Like all new technology, the adoption of Open Banking brings benefits to clients and financial institutions. Check it out!

Improved user experience
The Millennials reached adulthood and brought with them the demands of a much more diverse and client-oriented service offering, such as streaming platforms such as Netflix and Spotify.

These channels are distributors of products that were not necessarily made by them but offer a huge variety of options for the customer. By algorithms, they manage to arrive at the one that most approximates to the taste of the consumer, with a light language and without bureaucracies.

In the financial sector, Open Banking provides a similar experience. Banks' financial products can be provided on a variety of platforms, which can for example be specialized in a single type of product, such as insurance or loans - and the user has a much wider choice.

Diversifying revenue sources
The other side of the coin, for banks and financial institutions, is that they earn multiple channels to offer their products.

So, if before the consumer had to go to the bank's specific channel, and often go through the bureaucracy of opening a checking account, now that same user can access the product on several different platforms.

For the bank, the advantage is in the diversification of sources of revenue. In a comparison with the retail, it is as if the consumer had to buy the products directly from the factory and now could choose between several options (and different manufacturers) in a market.

There is also the benefit of relying on the intelligence of the platform to suggest the alternatives that are best suited for it.

Still in relation to the diversification of revenues, the bank gains the possibility of participating in sales of other products that are not part of its core business.

And what are the challenges of Open Banking?

As in any segment, along with the advantages also new challenges arise. Regarding Open Banking, we can list some, such as the ones below.

Regulation
Regulation is one of the main challenges of Open Banking. You need to define exactly what bank details can be passed and the rules for that. Here we are talking from the customer register to the transactional side, with account movement and balance.

Thus, these issues must be taken into account in order to devise regulations that actually give rise to the innovation that this technology allows, while maintaining the security of customer data.

Standardization
Each bank created its own API standard. In practice, this makes it impossible for a startup to simultaneously connect with multiple institutions.

Safety
Safety is always an important issue when it comes to the financial market. In this sense, the understanding is that banks and fintechs are prepared to provide the necessary security to the clients, since both need to pass through the Central Bank sieve to be able to operate.

In short, the adoption of Open Banking places the company in a prominent place in the market. The company will be known for its drive for more innovation and integration with the developer community in the area. With an ecosystem of third-party applications integrated into your services, the ability to create new business is maximized.

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