Open banking is a trend of empowering customers to share their banking data with fintechs and financial institutions. However, in order for banks and credit unions to succeed in this new environment they must wholly commit toward integration automation and digital transformation to allow for hassle-free connectivity for an enhanced customer experience. 

Open banking, which began in 2017 as a regulatory scheme in Europe, is now a worldwide initiative. It includes account aggregation, personal finance management, instant credit assessment, loan applications, and account originations.

In the last several years, open finance, an extension of open banking, increased the range of open banking to encompass additional datasets such as credit, mortgages, savings, pensions, tax, insurance and investments. The eventual end point is open data, where customers share select information to attain better products and services serving their daily needs.

Traditional financial institutions, such as banks and credit unions, need to start incorporating open banking strategies into their technology development. According to the Open Banking Project, 10 to 11% cent of digitally-enabled consumers now actively use some form of open banking service. 

U.S. regulators also recently signaled a change coming. Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra proposed new data sharing requirements that would obligate financial institutions to share consumer data upon consumer request, empower people to break up with financial institutions that provide bad service, and unleash more market competition. “If successful, it will also reduce the ability for incumbents to build moats and for middlemen to serve as gatekeepers. It will provide big advantages to those who provide the best products, service quality, and rates.”

Enabling Open Banking with APIs

Open-source software programming interfaces, aka application programming interfaces (APIs), allow developers to assimilate innovation faster. API capabilities, like navigation and authenticating customer accounts, enable tech giants like Amazon, Netflix and Spotify, among others, to introduce consumers to extreme personalization for things like shopping online, ordering groceries or watching TV.

Similarly open banking allows the interaction of data and accounts for financial institutions, customers and third-party developers to create services and technology interfaces for financial institutions. 

As open banking evolves into open finance, and eventually into open data, a competitive and collaborative ecosystem will depend more on integration automation and digital transformation involving financial institutions and fintechs through the use of APIs. This will accelerate innovation and increase the financial service industry disruption. 

The banking industry already sees some products and services emerging from this confluence including buy now, pay later (BNPL) credit options embedded through APIs at the point-of-sale; pensions dashboards that allow consumers to see all their annuity accounts in a single aggregated view; treasury and corporate banking featuring APIs that enable a change from batch to real-time processing; and accounting automation, which allows small and medium-sized businesses to synchronize their banking account and general ledger in real time.

Key FI Must-Haves For Financial Institutions

Digital transformation and tech integration can power new banking capabilities that enhance the customer experience. As banking becomes a more virtual experience it is also important to leverage technological capabilities such as analytics, data, and artificial intelligence (AI). 

Here are some examples:

  • The Emergence of Hyper-Personalization

The expansion and adoption of digital banking has helped create a highly individualized customer experience known as “hyperpersonalization,” which Deloitte defines as “using real-time data to generate insights by using behavioral science and data science to deliver services, products and pricing that are context-specific and relevant to customers’ manifest and latent needs.” A Salesforce survey found that 56% of customers expect financial institutions to anticipate customer needs and make appropriate recommendations even before initial contact.

  • Building a Customer Centric Digital Approach

Many financial institutions, and many new can competitive players, are now implementing a more customer centric approach built into digital banking capabilities. Technologies such as AI, blockchain, cloud, and Internet of Things not only reshape the competitive environment in the banking space but banking business models as well. 

Global enterprise technology provider NCR recently announced the acquisition of fintech intellectual property for open banking from Spoke Technologies Limited. The acquisition accelerates NCR’s move into open and international digital banking adding data integration capabilities supporting personalization and customer-led experiences.

  • Engaging Robotic Process Automation (RPA)

RPA, AI virtual assistants, and chatbots, are self-learning tools designed to perform monotonous and repetitive banking tasks. Automating repetitive tasks helps financial institutions produce meaningful customer engagements that are real-time, fast, efficient, and productive. Consequently, financial institutions are better positioned to diminish labor-intensive efforts and permit administrators to concentrate on more intricate, strategy-driven tasks.

  • Integrating Loan Origination Software 

Tech spending on loan origination was guesstimated at $7.3 billion, or 44%, of overall loan IT spending in 2021, with expected growth to $9.7 billion by 2025, according to IDC’s Worldwide Banking IT Spending Guide. The report also calculated that third-party platform as the largest area of technology investment by the banking industry in 2022. FIs already devote significant spending around digital lending in areas including credit decisioning, fraud management, process automation, and customer experience. FIs will find more revenue opportunities and expand customer engagement as they invest to modernize loan origination processes.

Partnerships and Integration

Schemes driven by open banking finance and data figure to evolve into the new banking normal, according to Open Banking and Open Finance Report 2022. These trends will be deeply embedded and almost invisible in routine customer journeys. But they are difficult to achieve without new collaborative relationships between financial institution and fintechs. 

Partnerships between fintechs and financial institution are mutually beneficial when it comes to automation integration and digital transformation. For credit unions and banks, tapping into new technology can extend their market reach, connectivity to customers and provide new revenue opportunities. 

NXTsoft offers secure paths for financial institutions to free up and connect with fintechs. OmniData enables financial institutions to access its data quickly and securely; and OmniConnect, the vendor agnostic premier open banking marketplace for all API needs, provides API connectors for as many as 40 different core accounting systems. An API marketplace — which includes an API manager, gateway, security, publisher and developer — helps bring financial institutions and fintechs together.