Market competition, innovation and more compelling services for end users are an integral part of open banking foundations. In contrast, traditional banking used to impose stark offerings on consumers only a few years ago. Although customers seem at the centre stage of this financial data revolution, there are plentiful growth opportunities for every party involved.
Open banking has paved the way for better financial products and services, tailored to the specific needs of customers who now have access to more efficient ways of potentially changing their lives – business loans, mortgages, home loans.
In open banking, opportunities come from the large amounts of data owned by financial institutions, most of it stored instead of being used to drive innovation. Traditional banks have always been very conservative, since they benefited from the fact that they had exclusive access to their customers' financial data.
Modern regulations changed this, by pushing for the sharing of this precious information in order to promote the development of better products and services. These offerings were designed to help end users instead of acting like an additional obstacle to their real life needs.
One thing to always keep in mind is the fact that customers always have to consent to this data sharing, a sine qua non prerogative to access that works as a first security layer, paramount to the success of those operations.
The transition to an open banking economy, one that allows regulated third-parties to enter the market and push the development of adequate solutions for people’s problems, brings opportunities in areas like:
- Data processing
- Individualization of services
- Removal of traditional obstacles that hinder development
The risks of open banking
All of this does not imply that there are no risks to open banking. After all, the best opportunities come from overcoming challenges. Regulated open banking markets may face some shortcomings due to the imposition of requirements that may be a hindrance to development and transformation.
Finding ways of offering new and improved products and services within the confines of rules and regulations like PSD2 may prove difficult for those who think outside-the-box. On the other hand, non-regulated markets are at risk of falling behind competition and not offering the desired transparency that is vital in today’s world. Even worse, those who don’t follow suit will probably see their customers move away to more beneficial solutions.
But with opportunities come benefits, and there is no shortage of those in open banking for financial institutions, businesses and customers alike, especially if they are not stopped by threats and risks. In the next few lines, we will explore some of the things that can drive all parties involved to the future of online banking.
Open banking opportunities for banks
Many people look at banks as being on the losing side of open banking, but a brief analysis proves this argument wrong. The demand for banking products is bigger than ever, and better technologies will definitely help banks to ensure the competitiveness of their offerings, not only in pricing but also in customer experience.
Here are some of the benefits of open banking for banking institutions:
- More offering diversity: by opening their APIs, banks can easily connect to other service providers and expand their portfolios;
- Partnerships: banks can invite customers to access relevant account information from other banks through one integrated interface;
- Access to additional data: by connecting to other open APIs, banks can access and analyse additional information about the behaviour of their customers to offer tailored products and services;
- Digital banking services: open banking will not only help banks to improve and automate their decision making processes, but also adapt to market needs;
- More revenue: better and faster decisions will ultimately expand sales channels and lower costs, which will result in higher revenues;
Open banking opportunities for Fintechs and Startups
Fintech companies and startups can greatly benefit from open banking, serving as a driving force for development and opening the door for a world of new opportunities. Here is how they can benefit:
- New products: most traditional banks do not directly offer adequate services for today’s needs. Fintechs and startups can establish themselves as disruptors and conquer a space in an ever changing market;
- Marketplaces: Fintechs and startups can gather different products and services in one place, giving customers access through one application;
Open banking opportunities for customers
End users might know nothing about open banking, or they might feel hesitant about it’s adoption because they do not understand the benefits. Even in the European Union, there are very few campaigns to increase awareness about these regulations.
Let’s have a look at how open banking can improve everyone's lives:
- Tailored products and services: financial data analysis brings the benefit of tailored solutions that can solve real problems;
- Better financial management: all your products and services in one place, and access to organized data allows end users to have a better understanding of their finances behaviours;
- Time and money savings: less time spent searching for optimal solutions, as all options are available at a glance. Better yet, higher competition lowers the cost of services;
- Faster payments: recurring payments can be made through one open banking app and authorisation step, instead of spending precious time jumping from one application to another;
Open banking benefits for the economy
Even though open banking was developed as a customer-centric concept, its benefits for end users and other players in the market reflect on the economy as a whole. The implementation of the Revised Payment Services Directive (PSD2) helps the banking sector evolve and make it more suitable for the modern digital age. This piece of regulation alone has long term benefits for local and regional economies and its impact is already being felt in business approach.
Open banking encourages competition, and smaller companies now have the same chances of thriving as banking giants. By making all players meet the same requirements, market cap or client list are no longer distinctive factors in success, promoting synergies and development for the greater good.
The Fintech sector is already feeling the benefits of open banking, establishing not only high-skilled jobs that attract top talent but also adequate responses to modern financial needs.
Open banking should also be seen as a sustainable foundation to the future of the economy, potentially and ideally improving the economic state for generations to come.
How can open banking help with your loans?
Open banking plays a critical role in the development of the lending industry, having already become mainstream for many loan and credit businesses. The easy and secure access to customers’ financial data helped streamline risk assessment processes for these services, benefiting both end users and lenders.
Lenders that use open banking can now offer enhanced loan application processing, resulting in better customer experience, more options to choose from and faster decisions that save everyone’s time.
In order to get a loan approved, customers have to prove to the lender that they are able to pay their money back. Traditionally this process can be somewhat painful.
Since banking institutions know exactly how much money a customer earns per month – as well as how much they spend - they lock themselves as an ideal source of information. Open banking changes this for the better, by allowing third-party providers (TPPs) to access relevant information through secure and PSD2 compliant application programming interfaces (APIs).
At this stage, it’s important to highlight two important facts:
- Only customer approved TPPs can access their banking data;
- Open banking is only accessible to regulated and authorised providers;
Loans through open banking are becoming increasingly more popular in the UK, for example, with many high street banks adopting these regulations to streamline their processes and provide better services for their clients. This is done through almost real-time assessments without relying on credit history or exhaustive bank statement analysis.
A more comprehensive screening of the data also has the ability to allow customers with bad credit histories to have access to loans via open banking. If traditional banking relies heavily on credit history to make decisions on new loans, open banking gets the relevant data directly from the consumer.
After that, data insights categorises and organizes every transaction to make the decision making process seamless, potentially resulting in different outcomes for the same situation, to the benefit of the end user.
By getting rid of traditional credit check tasks, lenders are now adopting a more realistic approach by assessing current financial health through open banking application programming interfaces.
However, this does not mean that you will be able to easily borrow money with bad credit scores or access no credit check loans. There is still an evaluation process to determine eligibility.
The difference is that by using open banking, lenders now have an instant overview of information about income/outcome volume, spending habits and affordability.
One of the most important aspects of loans is the difficulty of getting a first loan or line of credit, since lenders usually count on information provided by credit bureaus. This data includes, generally, personal details, how many active loans or credits are outstanding, if a person ever missed or defaulted loan payments or if there are any court processes against the customer.
This results in a static credit score that ascertains the risk level of lending money to a certain individual.
Open banking loans remove this enormous obstacle, and allow first time customers to have access as long as they have a stable financial situation. Through the lens of open banking, lenders can evaluate potential borrowers’ current situation and make informed decisions on what options they can provide to each individual customer.
Open banking credit checks, how does it work?
One could argue that one of the largest benefits of open banking is the ability to quickly verify creditworthiness. Faster access to credits and loans could mean more opportunities for life changing decisions like starting a business or faster tenancy verifications. But how does this all work?
With consent from the user, authorised open banking APIs collect data from multiple accounts and organize it in order to make risk assessments and/or find suggestions for finance management and budgeting, for example.
Credit checks are done by evaluating your income, current monetary situation and existing active liabilities. All data is processed in seconds through AI-based software, removing human error from the decision making process.
The end result is a quicker verdict after applying for credit and less bureaucracy, benefiting all parties involved.
What is a traditional credit check?
A traditional credit check is when a lender consults the registry from a Credit Bureau to assess a borrower history. This process is very limited when it comes to understanding the current financial situation of a person, since it is based on lifetime events.
As an example, an unfortunate event that happened in the past can still affect present credit scores. With open banking, that won’t be an issue anymore, as it takes into consideration the real present financial situation of each individual.
Open banking makes lenders’ lives easier
Lenders that use open banking can benefit a lot from adopting new strategies to enhance business operations and customer experience. This new set of regulations removes most of the friction caused by parties not sharing transactional data, giving an edge to the industry and everyone involved.
The modernization of financial operations created a renewed demand for digital products and services like open banking apps, providing many growth opportunities, new revenue streams and establishing the future of banking. Of course, lenders had to adapt by developing systems that were able to assess customer eligibility based on real-time information.
In the past, this assessment process was lengthy and time consuming due to its dependence on insufficient financial data, usually outdated. This delayed decisions and did not grant sufficient insights to provide responses in a timely manner.
Furthermore, on the customer experience side, ineffective ways of doing business drove a wedge between customer’s expectations and what a lender could offer, resulting in dissatisfied clients and negative business outcomes.
Open banking loans upgrade business offers by acquiring the necessary data in real-time, retrieving relevant information directly from the client’s account. By doing so, all data has been previously verified and the possibility of manipulation is eliminated since it came straight from the consumer’s bank. Lending in banking is facilitated, because lenders can now see all the required transactions and can double-check their offerings to a potential customer, reducing conflict between all parties involved.
How can lenders benefit from open banking?
Here are the three most important advantages that lenders can implement into their businesses:
- Data acquisition: first impressions do count and they are critical to lenders, as they serve as a key factor to customer attraction. After all, happy clients result in growing conversion rates. In the past, a customer had to manually fill various forms, providing the necessary information. This brought inevitable bureaucracy, mistakes and income manipulation. Open banking eliminates this antiquated process and allows for everything to be done digitally, accessing data straight from the customers’ bank accounts;
- Real-time income verification: manual work will always encounter possible misconducts and open the door to application delays and frustration. With open banking loans, income verification becomes a much more streamlined process, using real-time transaction information. Lenders can instantly determine if the client’s income is steady, evaluating parameters like changes in salary. This leads to better lending conditions, which in turn implies higher sums of money, lesser interest rates and more favourable terms for repayments;
- Invoice settlement: open banking lenders can approve an application and make the payment initiation process much easier by allowing invoices to be paid within their own website. With the help of autofill, relevant information is automatically added to the required form and the payer only has to approve open banking payments, all in one convenient place. This simplified procedure eliminates added fees, saves time and increases repayment rates as borrowers can initiate payments anytime, anywhere;
The future of banking and open banking loans depends on whether customers trust modern mechanisms and are willing to allow third-party connections to their bank accounts. Modern users, however, demand faster services and easier interfaces that work as a one-stop-shop to satisfy their needs.
If allowing these connections brings about shorter loan application assessments, there is little doubt that they are willing to take this step. More so if they have to spend less time dealing with their obligations but do not have to worry about the safety of their assets.
Should you use open banking for referencing?
Referencing is a popular practice, usually used to verify the integrity and authenticity of someone’s claims.
In open banking, referencing is a powerful tool that can be used to verify eligibility and data authenticity, removing the need for exhausting and complex processes in today’s financial landscape. This invaluable mechanism can be used mainly for tenant reference, simplifying the way your finances are verified, granting you the inalienable right to rent.
If you think about it, just to provide the necessary documentation for the property owner, potential tenants had to get at least a few papers authorised. This is a needless challenge that takes too much time and effort, something that can easily be solved by open banking and its simplified and streamlined procedures.
How can landlords and tenants benefit from open banking?
Property owners and potential landlords are just one simple consent and login away from all the necessary financial information that facilitates tenant references.
Open banking services are able to gather, process and pass data through APIs, granting permission to let in a matter of minutes – no queues, no scheduling.
For a better understanding of how efficient this process is, let’s have a look at an open banking reference architecture:
- Client accesses the service or the app that serves as gateway for information processing;
- Client expresses intent and consents to the sharing of data for referencing purposes;
- Through an API, clients are directed to the next view where they’re shown a comprehensive UI/UX screen with visualizations, showing the authentication (login) possibilities;
- User selects the most convenient method to login and does it;
- Data can be passed on after the user approves it for one final time;
- Data is analysed (usually by an AI algorithm) and processed within minutes;
Open banking referencing will most certainly be used in the future as the main tool for verifications, allowing for everything to happen much faster and without traditional hurdles that are made obsolete by modern digital technology. It is up to every player involved to push for the development of new ways of opening the floor to reference for rental.
Open banking tenant referencing has many benefits, available to private and corporate consumers. The one that jumps to mind the most is how much quicker and efficient the verification process gets. Furthermore, it can be implemented in almost any sector, due to the seamless transition of data from one party to another.
Data delivery happens instantaneously, allowing service providers to act and decide more expeditiously thanks to the implementation of automated tools and Artificial Intelligence. This regulated technology also adds the benefits of security and privacy, answering the one question that everyone has in mind: is open rent safe? Yes, it is. More than ever.