Banking as we know it is evolving at a rapid pace. New technologies and innovation are causing financial institutions to reimagine traditional practices. As more and more digital banking services enter the scene, these institutions must also consider how customer expectations and behaviors are shifting.

Open banking is a relatively new financial practice emerging around the globe. With the help of this banking method, the possibilities for gaining more insightful and accurate data are greatly boosted. Rather than having to rely on a singular bank, open banking enables customers to utilize a much wider range of digital banking services.

Customers are embracing open banking – and many financial institutions are following suit. In this article, we will help to define open banking and cover four key advantages of the practice for financial institutions.

What is Open Banking?

The term open banking refers to the process of sharing customer data and information across a secure network between multiple financial institutions. To do this, the customer must first agree to a set of conditions regarding the security and privacy of their information.

As a practice, open banking enables financial institutions to gain better data and insights regarding customer behavior and decision-making. This is achieved through the use of APIs – application programming interfaces that allow a customer’s financial providers to communicate with each other.

According to Investopedia:

“Open banking will allow the networking of accounts and data across institutions for use by consumers, financial institutions, and third-party service providers. Open banking is becoming a major source of innovation that is poised to reshape the banking industry.”

Four Key Advantages of Open Banking

Open banking is the future of the financial industry, according to recent research.

In May 2020, Finastra studied more than 750 global banks in their report Open Banking and Collaboration: State of the Nation Survey 2020. In this report, they found that 86 percent of surveyed financial institutions are aiming to use open APIs to enable open banking within a 12-month timeframe.   

To remain competitive, financial institutions must not turn a blind eye to the growing popularity of open banking. As more institutions work to adopt the practice, understanding the potential benefits of open banking is essential.

Here are 4 important advantages gained through open banking:

1. Increased Collaborative Opportunities               

Open banking involves a lot of moving parts. To keep customer data safe and minimize risk, a financial institution must be highly considerate of each stage of the open banking process. This inherently encourages collaboration between traditional banks and newer FinTech-based business models.

The reality of open banking is that it utilizes an intense omnichannel approach. Financial companies are no longer closed off in their own individual bubbles. Instead, institutions must work with one another to ensure each link of the open banking chain is as sturdy as the last.

While this increase in cross-company collaboration is certainly an adjustment, it is also a critical enabler for further innovation. By embracing this collaborative model, financial institutions can work towards creating a more open and innovative global financial industry.

2. Greater Ability to Make Foresighted Decisions

Greater access to data and insights gives financial institutions a much-improved ability for making foresighted decisions. This can include everything from the decision-making process during onboarding to gaining a deeper understanding of current privacy mandates and regulatory change.

Changes to the financial industry are happening at a rapid pace and on a global scale. The speed of these shifts makes the burden of decision-making all the more prevalent for financial institutions. With open banking, however, these institutions can gain powerful predictive models that help better inform their decisions when determining various strategies.

3. Heightened Customer Satisfaction

Open banking enables open accounts information, meaning financial institutions can provide customers with a holistic view of their financial transaction history. With this access to information, customers can also receive aggregated insights that help them improve their financial behaviors and decisions.

From the perspective of financial institutions, this information helps to improve overall engagement and customer retention. By sharing information between digital finance providers, banks can personalize customer experiences with much greater accuracy and detail. This includes offering customized recommendations based on the customer’s financial habits and history.

4. Improved Digital Agility

Digital agility refers to an institution’s ability to adapt to change and implement solutions at a fast rate. A high level of agility is dependent upon many factors including the digital processes and software being employed.

Open banking removes barriers to communication and collaboration not just within a sole company, but across the entire financial industry. As a result, institutions gain access to new talent and skilled partners who empower them to transform their business models with greater prowess.

Heightening a bank’s digital agility is a cornerstone for success in this technological era. Plus, greater agility also provides the necessary support institutions need as open banking models continue to expand and flourish. 

Final Thoughts

The potential benefits of open banking for the financial industry are simply too great to ignore.

Customer expectations are shifting alongside the digital evolution of the industry, causing many to seek institutions that prioritize customer-centricity.

With open banking, financial institutions can meet the new demands of customers while also updating their business processes to be more foresighted and agile.

The future of finance likely lies within open banking – and embracing the practice is key for institutions that aim to achieve high levels of growth over the next decades.