Open banking is a banking practice that securely shares financial information, such as consumer banking transactions and other financial data, to third-party financial service providers (Estevez, 2020). Sharing data is done through the use of application programming interfaces (APIs) and only with the consent of customers (The Balance, 2020). Open banking is the driver behind both innovation and competition in the financial industry (Cahill, n.d.). As a result, many industries have adapted to become more digital and take advantage of open banking technology.
The article will include 15 open banking use cases. The open banking examples will cover personal finance, consumer lending, BNPL, mortgage lending, wealthtech, real estate, payments, telecoms, credit bureaus, debt collection, insurance, iGaming, business lending, crypto and investment platforms. Where possible, open banking API examples will be given.
Important financial matters used to be handled almost exclusively in person. However, with the increase in digitisation, recent limitations of in-person contact and communication, and changes in behaviour and habits surrounding personal finance have spurred on changes (Szota, 2021). Personal finance applications have become increasingly popular. In 2020, time spent on finance apps was up 45% from the previous year, and the number of global iPhone users who activated Apple Pay grew by more than 65 million people (Szota, 2021).
Open banking enables financial service providers access to bank account information needed to deliver accurate services and products for their customers. Open banking helps improve the relevance of services for customers through specialised third party providers (TPPs), which is one of many open banking API use cases. Personal finance apps can analyse spending habits, deliver dashboards and offer customer-specific product recommendations (Rousseau, 2020). Furthermore, open banking helps deliver fast and secure payment services. Payment Initiation Services provide customers with the reassurance that their money is safe (Rousseau, 2020).
Digital lending was a response to the pain-points customers experience with traditional lending, such as tedious loan processes and the requirement to have good credit history for access to bank loans (Infosys BPM, n.d.). It was also a response to the digitisation of personal finance, as digital lenders sought to fill the gaps where customers expressed a preference for digital services. For some, financial institutions had made borrowing too hard or simply inaccessible (Infosys BPM, n.d.).
Consumer lending is becoming increasingly digital. Open banking allows companies to build a process that increases conversion rates and approval rates for creditworthy customers. Open banking helps companies automatically acquire and analyse open banking data, meaning the number of clients that have a limited or no credit history can be instantly eliminated. Furthermore, open banking helps increase the speed of loan application screening and approval. Finally, open banking reduces admin costs by reducing the number of manually entered data points and allows population risk-critical information.
“Buy Now, Pay Later”, or BNPL, has become increasingly integrated in the checkout process for online retailers, with one fifth of European retailers currently offering BNPL services (Business Wire, 2021). The industry revenue is forecast to grow 9.8% annually over the next four years to more than $1 billion (Yeoh, 2020). Recent popularity of this service can be attributed to the worldwide economic disruption that happened in 2020, causing online shopping to become the norm (Business Wire, 2021).
BNPL is all about ensuring high purchase conversion rates, while also reducing the number of steps that customers need to take to get what they want. Open banking helps keep high conversion rates while gaining information about loan applicants - enabling lending decisions to be both fast and accurate. Additionally, open banking allows for quick credit checks to be performed by avoiding the need to connect to traditional credit bureaus.
Mortgage lending is one of the open banking use cases for banks. Digitisation of the mortgage sector has been slower than for other financial sectors. However, the 2020 lockdowns forced the mortgage industry to integrate more technology into their businesses (Saines, 2020). The way customers used financial institutions changed profoundly, with the pandemic significantly increasing online penetration (Meneses et al., 2020). The rise of fintechs has also caused a shift in the mortgage lending market, as traditional banks are no longer the only mortgage lenders. Due to advances in AI, machine learning and robotic process automation, both new and traditional lenders have been able to configure technology to meet the changing needs of the market (Camerieri, 2020).
In the mortgage lending industry it is important to understand customer needs, offer appropriate loans, as well as make the loan process as seamless as possible. Open banking allows mortgage lenders to reduce the number of steps required to apply for a mortgage. Furthermore, open banking reduces admin costs for each individual loan application by reducing the number of data points needed to be manually evaluated and allowing the inclusion of population risk-critical information from loan applicant bank accounts. Finally, for loan brokers open banking automates matches between lenders and loan applicants by enabling access to more information to make better lending decisions.
Wealthtech has become increasingly popular over the last few years. Due to change in customer expectations, regulatory requirements and competition from fintechs and wealth management has had to keep up. Wealth managers are moving towards technology to enhance solutions that already exist (Jones, 2019).
Wealthtech is using open banking to reduce friction for its users and improve their user experience. Open banking allows easy onboarding of investors by removing inefficacies, such as the need to manually upload documents, directly accessing financial data and performing instant credit checks (Bayat, 2020). Furthermore, open banking offers a secure way for customers to transfer funds to and from their bank accounts. Additionally, open banking enables wealth managers to deliver personalised investment advice by giving access to investors’ financial data (Bayat, 2020).
With the development of a virtual real estate market, technology has already revolutionized the way people buy and rent houses. Landlords can post and renters or buyers can view listings from the comfort of their homes (Casagrand, 2017). Furthermore, virtual home tours use 3D modelling to allow buyers and renters to virtually walk around the property. Where technology meets real estate it is considered proptech.
Proptech has transformed the real estate industry by offering services for real estate professionals, property owners, and investors while also catering to end customers and their homes (Asper Brothers, 2019). And now, open banking is transforming proptech.
It is important for landlords, real estate companies and mortgage companies to access valuable information about the tenant’s current financial health and ability to make rent payments or to qualify for a loan. Open banking allows tenants to prove creditworthiness to landlords by allowing direct and secure access to income information. Furthermore, open banking fills in information gaps where credit bureau data is not available by providing reliable information about tenants’ income levels and stability. Finally, for loan brokers, open banking automates matches between lenders and loan applicants by enabling access to more information to make better lending decisions.
The banking industry has been slow to change but with the introduction of digital payments and mobile banking, the change has been well on its way. Now, the wave of fintechs focusing on digital based solutions has turned banking into software services (Peplow, 2021).
The pandemic has caused a shift to e-commerce, an increase in online transactions and the growth of the digital marketplace (Peplow, 2021). When it comes to in-store purchases, consumers no longer want to use cash but want the same instant feel of it. Consumers expect their banking options to align with their fast pace lives and that means same-day payments (Feedzai, 2020).
Payments need to be secure and seamless and open banking allows for a frictionless customer experience when authorising payments. Open banking verifies users’ identities and bank account numbers before authorising a payment or withdrawal of funds without the need to send bank statements.
Telecommunications (telecoms) have been forced to invest in order to keep up with rapid development of technology. And with the pandemic, the push has been even greater. The industry has become central to modern society with every person needing to either work or study from home (Nattermann & Sauer-Sidor, 2020).
Financing of consumer electronics drive purchases. Traditionally, customers needed to “build credit” before accessing the latest technology but today open banking allows telecoms to expand their customer base and offer financing to more customers. Open banking helps to reduce credit risk by accessing more information that is then used to evaluate customers' financial health. Furthermore, open banking enables telecoms to fill in information gaps where credit bureau data is not available by using alternative data.
Technological changes are revolutionising how credit is reported. Traditional credit scoring used limited data resulting in only a snapshot of a person's entire credit profile (Freas, 2018). Also traditional credit scoring may provide an inaccurate presentation of a customer’s credit due to a lack of data (Belyh, 2019). Now more data is available and credit bureaus are seizing the opportunity to revolutionise how creditworthiness is evaluated.
Credit bureaus need to access and process customer information in order to accurately determine creditworthiness. Open banking reduces administrative costs by eliminating manual document collection. Furthermore, open banking allows credit bureaus to analyse consumption patterns, such as over spending, to provide better credit (Julio, 2021). Additionally, open banking prevents fraud through authentication and verification of validity of data (Julio, 2021).
Manual processes traditionally used for debt collection are no longer efficient nor effective. The pandemic has caused millions to lose their jobs and in many countries consumer debt is at a record high (Lazarus, 2020). The uncertainty of the global economy is also creating a new type of debtor. This debtor has temporarily fallen into debt and is likely to be highly motivated to resolve their debt to protect their credit rating (Kenneally, n.d.). Traditional practices will struggle to keep up with the amount of customers while also harming customer relationships. This is why many debt collection companies are changing.
Debt collectors need to understand the financial health of customers and help them settle their debts. Open banking increases the amount of data available and enables debt collection agencies to more efficiently collect and refinance debt. Open banking enables debt collection agencies to understand income stability and active loan loan payments by providing access to the customer’s current cash flow.
In the past, obtaining insurance has been a tedious and complicated process and people were less educated on its importance. Traditional insurance was expensive, especially if brokers, agents and any other middle-men required their cut (Policy Bazaar, 2020). Today, with digitisation, the middleman has been removed and the buying and claim process of insurance has become simple and approachable. With so much information available online, not only do people understand the importance of insurance but they are able to understand what they want and choose which policy is best for them.
More and more people choose to pay monthly for insurance and to reduce the credit risk associated with financing larger insurance products, open banking can be used to evaluate creditworthiness of customers. Open banking verifies users’ identities and bank account numbers before authorising a payment or withdrawal of funds.
iGaming has come a long way since the first online casino game from Microgaming in the 90s and, in over 25 years, the industry has grown significantly (European Business Review, 2019). Casino revenues in Europe now exceed €20 billion each year and the industry is expected to be valued at €100 billion by the end of the decade (UKTN, 2020). With the adoption of VR, AI, machine learning and Blockchain casinos the future of iGaming looks promising.
With technological advancements iGaming companies have the opportunity to improve their services and match customer preferences regarding payment options.
Open banking enables seamless and secure account top-ups as well as instant payouts to customers through direct authentication and direct payment. Also, open banking allows iGaming companies to fight fraud by accessing account data and analysing transaction history (von Bahr Emilson, 2020).
Until now, technological investment has been in consumer lending or specifically the small business sector rather than commercial lending. The lack of investment as well as the continuous reduction of bank branches meant that the borrowing experience for businesses was slower, impersonal and less informed by credit (Wintermeyer, 2020). The pandemic changed this. It prevented traditional paper-driven, face to face loans and forced commercial lenders to move toward digitalisation (O'Malley, 2021).
Business lenders require data to make decisions on which businesses are eligible for loans. Open banking means lending companies can build a process that increases conversion rates and approval rates for creditworthy customers. Open banking allows automated bank statement collection. Open banking provides data regarding the debit and cash flow profile of a business and enables business lenders to understand the financial health of a business.
Bitcoin created the world's first decentralised alternative currency in 2009. 9 years later, governments finally joined the race. Venezuela issued the first sovereign digital currency in 2018 (Didenko & Buckley, 2019, 1041). Today, there are close to 8,000 crypto currencies in existence and many countries have been piloting their own digital currencies (Sephton, 2020).
Crypto needs to be secure and seamless and open banking allows for a frictionless customer experience when dealing with funds. Open banking verifies users’ identities and bank account numbers before authorising a payment or withdrawal of funds without the need to send bank statements. Additionally, open banking prevents fraud through authentication and verification of validity of data.
We’ve come a long way from only being able to invest through the stock exchange. Today there are many more ways to make money grow. Alternative investing, like P2P investing, refers to alternative asset classes outside of cash, bonds and stocks. Digitisation is shaping the alternative investment fund industry- but at a slow pace (KPMG, 2018, 2). Even if adoption is slower than in other industries, investment platforms are taking advantage of the digital age and becoming increasingly digitised.
Insurance platforms are using open banking to improve user experience and security. Open banking allows easy onboarding of investors by removing ineficies, such as the need to manually upload documents, directly accessing financial data and performing instant credit checks. Furthermore, open banking allows for in-depth credit checks, using enriched data, to determine eligibility of loan requests in P2P lending. Additionally, open banking offers a secure way for customers to transfer funds to and from their bank accounts.
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