How can banks respond to the open banking revolution?

Open banking possibilities are endless, yet many banks are still stuck in the dark ages. It’s time for banks to move with the times

Author: Stan Cole, Head of Financial Institutions, Inpay
March 30, 2021

The success of open banking has been widely documented, with more than two million people and small businesses currently using it in the UK. These services give third-party financial service providers open access to financial data from banks and other financial institutions through Application Programming Interface (API) driven ecosystems. Open banking’s popularity is no surprise considering the benefits it offers customers. It can instantly round up and save digital spare change from consumer purchases, recommend financial products and make cross-border payments cheaper, faster and more secure than traditional bank transfers. What’s more, the need to evolve has accelerated because of the pandemic. In order to thrive in this landscape and retain their customers, banks need to be proactive.


What challenges are banks facing?
While the banking industry has advanced in certain ways in recent years, COVID-19 has hastened the need for a real shake-up. As explained in this report by KPMG, the financial sector was one of the industries most greatly impacted by the pandemic, with most banks seeing the price of their stocks slump. This has forced them to look at alternative revenue models by re-evaluating their product offerings and customer needs, setting up a landscape full of opportunity.

“Although COVID-19 may lead to a crisis in the real economy, the impact on the banking system and on the bank-customer relationship can also be defined as a ‘positive discontinuity’ for the purpose of digitisation of the sector and the ability to offer an excellent customer experience,” the report reads. This is something that many banks are already working towards. A recent survey of 300 global banking executives by banking software company Temenos found that 45 percent plan to create digital ecosystems, while 29 percent have open banking initiatives in place. But what of those not being so proactive?

We already know just how big a year 2020 was for open banking, with a Mastercard study finding that 62 percent of respondents across 12 European markets were interested in switching to digital banking. The company’s recent Global State of Play report also revealed that 53 percent of the world’s population use banking apps more than they did pre-Covid. Consumers have come to expect fast, accessible, convenient payments using online and mobile solutions and banks are now under pressure to meet these demands. This is especially true while they face stiff competition from tech giant offerings such as Google Wallet and Apple Credit Card, as well as the fintechs quickly creating sleek, user-friendly apps using open banking APIs.


How can banks respond to this shift?
Rather than banks seeing fintechs as their adversaries, it’s much better to make them collaborators. Fintechs can use cutting-edge technology to build streamlined, innovative APIs to replace a bank’s old-fashioned products. They can also do so quickly as they aren’t weighed down by things like customer acquisition and legacy infrastructures. This lean, flexible approach enables banks to reduce costs and give their customers far more seamless experiences with competitive prices. Fintechs also work with banks to find and provide solutions to ongoing security threats. In return, these businesses can benefit from a bank’s trusted name and large customer base.

Such partnerships have been embraced by plenty of banks already, with promising results. HSBC, for example, was the first UK bank to launch a successful standalone open banking application. “That was all done in partnership with other firms, very little of the build was within HSBC,” Hetal Popat, HSBC’s head of open banking and PSD2, explains to Computerworld. “[They] move faster, do things cheaper and bring new ideas and approaches into the firm.” He also notes that the open banking data lets them accept more customers for credit products: “There’s a lot of customers out there in the UK who are perfectly creditworthy, but the data the bureau has on them is limited and therefore, due to a thin file, banks may say no. Now we get more data, we can say this customer is creditworthy and offer a loan.”

However, banks must also ensure that they choose the right fintechs to partner with. That starts by establishing exactly what problem it is they want to solve. As Vince Padua, chief technology and innovation officer at Axway emphasises in an article for Forbes: “For banks, knowing that your customers want all things but that your institution alone can’t be all things for them is key.” Only when they have prioritised their requirements can they find a fintech that will deliver what their customers expect and help out when things go wrong. The open banking trend is here to stay, and partnering with fintechs to offer modern and sleek APIs is necessary to increase customer loyalty and attract new clientele.