Security over speed: The source of sustainability for open banking

The shift towards open banking is gathering pace all around the world. As the benefits become more widely understood by consumers, businesses and regulators, open banking is bringing disruption to the financial services sector on a scale not seen before.

According to a report by PwC, by 2022, 71% of UK SMBs and almost two-third of adults will have adopted open banking, creating a £7.2 billion revenue opportunity for banks and fintech companies.

Dawn of the data-led economy

Open banking has paved the way for a new generation of financial products, giving consumers more choice and control over their financial lives, and driving competition in the industry. The banks, too, are seeing major benefits with a unique opportunity to create products and services that solve customer – both individual and corporate – pain points and improve services. But such rewards cannot be attained without improvement. Banks can do more than deliver their existing products better, by also focusing on enhancing digital and data analytics capabilities, improving personalization and delivering more value-added services. Particularly when it comes to on-boarding and security – two fundamental pillars of the open banking movement.

This is because a data-led economy is a high priority on the agenda of all stakeholders involved in the open banking ecosystem. A notable example and leading evangelist of open banking is The European Commission. It has published a Data Strategy proposal to allow the EU to take full advantage of data-driven innovations while prioritizing the interests of individuals following European values, rights and rules by managing the cross-sectoral use of data between sectors, while creating a scalable infrastructure for data markets that enables individuals and businesses to share data. It is this drive for data on a global scale that has the potential to shape people’s lives and well-being through services like automating switching and renewals between companies and many more.

Banking on a frictionless future

Of course, there are challenges with regulations and data sharing, not to mention the macro environment of security and threat of fraud. While this has made open banking a compliance puzzle for many, we can expect to see banks get serious about finding the value in open banking in the near-term. Many will be rolling out new capabilities and applications designed to make consumers’ lives easier and digital assets “stickier.”

A whole new wave of fintech businesses will disrupt traditional operating models and force large incumbents to transform or risk irrelevance.

New tools will also emerge like personal financial management platforms that aggregate spend data across users’ various banks, loyalty programs and payment platforms in order to provide insightful investment and financial advice. Indeed, this drive to create customer-facing applications that work without friction was highlighted earlier this year when the UK’s open banking Implementation Entity launched an official App Store to showcase the financial services apps which are currently using open banking APIs. It was created specifically to address the challenge of collating the work that has been done under one roof and encourage people to join the open banking movement.

Banks and fintechs will also become savvier in the way they source and analyze data in order to gain better insight into customer activity and interactions. The reality is that the key to profitability still rests in the bank’s ability to fulfil a greater number of their customer’s needs (whether through the bank itself or other third parties). Open banking has the potential to help banks know much more about their customers’ patterns of behavior, financial health, investment plans and goals; the challenge for these financial institutions will be in convincing their customers of the value in sharing their data.

The root of trust for consumers

Consumer trust is a critical factor in the success of open banking. Key to this is the way in which the consumer grants and manages consent to use their personal data. Consumers are becoming digital experts, and increasingly use mobile apps for everyday banking, payments, managing finance or e-commerce checkouts, and prefer biometrics for convenient authentication using elements such as fingerprints and facial recognition.

And while digital channels have increased remote availability of goods and services, and much has been done in the banking and FS sector, they’ve often failed to engage in a corresponding upgrade in the identity verification process. Issues around the failure of identification services to digitize in line with evolving digital channels must be resolved if customers and banks are to realize the promise of an increasingly digital economy. Most notably in a lack of standardized authentication and authorization mechanisms to acquire new products and services. Even today, we see examples of each new onboarded customer being required to provide repetitive information during the application process. In essence, this is the antithesis of the open banking movement.

There are also highly complex and expensive customer onboarding KYC requirements for financial service providers. It means customers face the challenge of trusting new service providers with their personal data so creating an approach that builds customer trust in safely securing their personal information is critical. A permissioned, trusted digital identity engenders greater customer trust in institutions, as customers have sole control over their identifying data that institutions may only share based on customers’ comfort levels around security and privacy.

Fit for the open banking era

Ultimately, is not a mutually exclusive decision. Financial institutions can keep their traditional, anchored customer relations all while adopting a new customer dynamic if banks keep their focus on data privacy and secure identity verification methods.

If nothing else, open banking shows that financial services are moving in the right direction. Banks are taking note of how positively consumers and small businesses have responded to fintech innovation and are starting to follow suit. More importantly, they’re starting to prioritize keeping consumer data in the consumer’s hands and make the processes of onboarding fit for the open banking era.

This article first appeared on Open Banking Expo.