Long reads

Open banking: The next frontier for enhancing financial experiences

Nate Marquiss

Nate Marquiss

Director of Financial Services, Trustly

This is an excerpt from Finextra’s report, 'The Future of Digital Banking North America 2023'.

We are in an era of great economic, environmental, and political change, and the immediate effects on the global market are increasingly noticeable.

The pressures that transpire from these changes have domino effects on how digital and financial services are used in our daily lives. In a remote-first world, the lines between physical and digital experiences are blurring – and it’s becoming hard to separate the two.

Consumers also realise their data is virtually everywhere. From the food they eat to the places they shop, it’s nearly impossible to participate in society without sharing bits and pieces of personal data. On the flip side, this phenomenon could be considered an opportunity for banks and fintechs to leverage this collected data for both their own and their consumer’s benefit.

Accessing financial data through open banking creates space for relevant and personalised innovation in ways that could enhance various experiences – i.e., payments, underwriting, KYC, account creation, etc. – while keeping consumers’ data secure. By opening up access to digital banking beyond its foundational infrastructure, companies are beginning to bridge the gap between consumers and merchants – creating a new frontier in the open banking revolution.

In the wake of said change, here are some key things to consider:

Optimise digital experiences with Gen Z in mind

The preferences of younger generations today are often short-lived and constantly evolving. A big majority of Gen Z and Millennials – who are digital natives by default – are active consumers in today’s global market. This means banks and fintechs are left at the mercy of keeping up with their evolving wants and needs.

Just a decade ago, the majority of consumer transactions were done in-store. Now, virtually three-quarters of the world’s consumption is done online. In the past, the primary focus was on creating satisfactory in-store experiences that people would appreciate, further driving repeat purchase behaviour. Today, those same ‘in-store’ priorities have evolved into building similar atmospheres that exceed consumer expectations solely in a digital world.

Simply put, young consumers want ease of use coupled with enhanced, personalised experiences. They have a natural affinity for speed and things that happen on-the-spot in real time. In turn, they want to change the way they pay for goods and services. The result? Today’s consumers are still fond of traditional card-based methods but they’re also seeking out better, more forward-thinking alternative payment methods. Because so much of their time is spent online, this desire has become an integral part of their daily interactions.

This influence from young digital natives has helped push open banking payments to the forefront of the digital revolution. These solutions create fresh, new options for younger consumers who actively seek out more streamlined, seamless ways to handle their money.

To further optimise payment experiences, banks and fintechs will need to keep a close eye on what their young consumers want and leverage this information to offer products and services that appeal to them. One method which creates space for actualising these desires is open banking. In fact, Worldpay’s 2022 report projects open banking will reach 8% of the US volume for all ecommerce activity. Ultimately, these efforts could strengthen merchant-to-consumer relationships, build loyalty and trust, and encourage repeat business.

Modernising ACH

ACH continues to reign as the fundamental building block of electronic money movement. In today’s financial climate, the basic functions of ACH are what they have always been, but new rules and changes over the years have helped to modernise its capabilities. For example, in 2020 the ACH implemented a new rule that increased the Same Day ACH dollar limit to $100K per payment. Following the change, NACHA reported the overall amount of Same Day ACH dollar volume increased by 86% in the same year. As of March of 2022, this same limit has been raised to $1 million per payment. This significant jump ultimately improves same-day use cases by eliminating unnecessary friction and speeding up transactions, further driving up consumer adoption of Same Day ACH.

ACH is also the precursor that helped fuel modern-day open banking payments whose innovative technology eliminates the middleman (i.e. networks, issuers, acquirers, gateways, etc.) and places the power back in the consumer’s hands, creating more room for instant, seamless payments. Open banking platforms have made verifying account details easier while speeding up the ACH payment process, further eliminating risk on both sides of the transaction.

Today, most fintechs offer open banking solutions that use API technology to communicate with banks to verify personal information instantly and securely. These new developments prove how the rudimentary functions of ACH can function with a modern-day spin on their practicalities.

Real-time payments are another form of modern-day ACH that continue to develop and grow in popularity. The Federal Reserve recently introduced its new real-time payment programme, FedNow, set to launch in 2023. FedNow is a new payment network that is derived directly from The Clearing House. Pilot programmes with select organisations have already been launched for the service, which will operate purely through domestic capabilities.

To keep up with new innovations, banks and fintechs should be onboard with safely sharing data between parties to achieve optimum speed and efficiency. There’s also a growing opportunity to learn from traditional credit and debit cards on driving consumer adoption of open banking via incentives and rewards. If users feel they are appreciated for trying out new technologies or adopting new payment experiences, they could be more likely to jump on-board for the long-run.

Simplify onboarding with open banking data

As financial data is being passed and shared so frequently, it’s wise for fintechs to prioritise improving their user onboarding processes. Are they designed with the user’s experience in mind? Are they making lives easier, or do they exist as another hurdle in the life of the payment process?

Recent statistics reveal that 63% of consumers consider a company’s onboarding programme as part of the buying process. The best onboarding processes do a good job of getting into the mind of the user to anticipate what they need to get onboard quickly and safely. The simpler the better.

For example, personal finance and wealth management apps are tools that are becoming smarter and providing more value to consumers. These are places where it’s important for onboarding methods to really shine. For most consumers, financial management is not something that is inherently fun. Plus, there is a natural hesitancy around turning over personal and financial information. Designing processes that adhere to these concerns is one way for banks or fintechs to gain trust and loyalty early on.

The best onboarding methods lead with the user in mind, meeting them where they already are. A few simple onboarding methods that banks and fintechs could implement are:

  • Creating quick and easy sign-up processes;
  • Pulling information directly from consumers’ bank accounts to reduce friction; 
  • A laser focus on safety and security (i.e. using encrypted data or not storing login credentials).

If companies can break through the barriers that stand in the way of building successful relationships with consumers ahead of time, it saves considerable hassle and prevents companies from having to restore connections later on down the line.

Implementing a seamless UX

It’s important to note that, after onboarding, the integrated user experiences that emerge once a consumer connects all of their data could also eliminate a lot of unnecessary friction. For example, a consumer could open up a new personal finance management or investing account and then also use the same open banking data to sign up for a separate insurance offer – all within the same app. The central idea of seamless flows and ease of use around onboarding should naturally carry over into how users interact within the payment platforms.

What’s next?

Open banking currently lacks regulation in the United States and is strictly market-led. However, the CFPB’s Dodd Frank 1033 new rulemaking will eventually change that. Multiple industry associations such as FDATA, ETA, and FDX are collaborating to push open banking forward in the US. This rule is expected to be finalised in 2023.

Right now, the US lags behind Europe in terms of establishing a regulatory framework that governs the way banks and fintechs collect consumer data. Dodd Frank’s new rules will establish a construct meant to bolster innovation, openness, and competition whilst protecting consumer data.

Lately, there is a push toward implementing open banking APIs in place of outdated routines (i.e. unethical screen scraping) with the intention of providing stable connections that merchants can rely on. This new way of obtaining consumer information requires contractual agreements between fintechs and banks in order to leverage data to provide new functionality and experiences for consumers. Once regulation is finalised, it’s expected that more banks will provide open banking APIs.

For the past decade, Europe is one market who has been using the above-mentioned open banking technologies, and they do have regulations in place. They are currently ahead of the curve and continue to develop the blueprint on what it means to operate in the open banking environment safely and effectively. Though they lead as a good example, the US is not far behind.

Overall, open banking APIs and a new regulatory framework will benefit consumers by democratising access to financial tools that were previously unreachable. Similar to Europe, a new wave of fintechs focused on building better experiences will likely flourish in the US as a result of these developments. It will be a very exciting evolution to witness in the coming years.

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