From the end of 2020, 24.7 million people worldwide use open banking. The estimated growth rate is 50% between 2020 and 2024. Open banking is an innovative approach to financial services and other related operations, which makes it a valuable segment as a banking service.
Despite the various advantages offered, the adoption rate by consumers is relatively low. An Axway survey revealed that more 47% of consumers feared losing control of their financial data in open banking. Are these concerns legitimate? How does open banking work? Is there a solution to these problems?
What is Open Banking?
The traditional banking systems we know involve lengthy paperwork, numerous management approvals and expensive teams to develop and test new products and services. Open banking is the gateway to innovation in the banking sector.
Banks use APIs shared with registered third-party service providers, financial institutions and smaller fintechs for the efficiency of their operations. Thus, open banking is a term used to refer to the process of publishing or “opening up” data allowing these regulated providers to use, share and analyze consumer behaviors.
Open banking is safe because banks have secure infrastructures to preserve and share customer data for as long as the customer chooses to be part of open banking.
What information is “open”?
The information shared when a consumer provides consent can be classified into three broad categories.
This includes information used to identify a user’s account. Such as:
- Name of the account holder
- Type of account
- Currency used
- Account opening date
- Transaction statement
Product data describes the specific products and services offered by a financial institution. In the traditional banking system, consumers had to go to a bank branch to find this information. With the development of the internet and telecommunications, customers can now contact the bank or find the details on their website.
With open banking, consumers can find the best options available to them, through the analysis of their financial data. Additionally, the information is stored in a standard format, which is easier for third-party vendors to process and identify the best products and services for them.
Initiation of payment
Payment initiations involve transferring funds from one bank account to another. Commonly used by consumers for online payment portals, this process often involves multiple steps such as entering account information, providing a security code, and entering an OTP for verification.
Open Banking speeds up this process by initiating payments securely through other software, apps or websites with consumer consent.
How it works?
Open banking relies on APIs that allow third parties to access information stored by the bank. Actors involved in the open banking initiative include government, regulators and banks. These players will need to agree on the APIs to be used for open banking.
The bank can then draw inspiration from them and implement them for the comfort of its customers. Small businesses, businesses, and individuals benefit from this application. Here are some examples of use cases in open banking:
- Improved payment solutions for businesses: With the ease of initiating payments offered by open banking, businesses can now opt for payment solutions that will improve cash flow, reduce costs, increase visibility and control, and reduce fraud.
- Loan available: In most cases, credit history can often be leveraged to design unfavorable borrowing terms. However, a customer’s creditworthiness is easily determined through historical bank account statements that lenders can access with open banking.
- Account aggregation: Customers no longer need to switch between multiple accounts or log in multiple times to complete transactions. Open banking allows customers to view all accounts under their name in one place.
Managing Consent in Open Banking
Open banking depends on the consent of consumers to participate in such an initiative. However, a 2020 survey found that only 30% of consumers in Europe were really comfortable with sharing their data even after giving their consent. The demonstration of low confidence in open banking is due to banks’ lack of transparency in their consent management systems.
Financial institutions, fintechs and data aggregators are accountable to different regulators. This difference can often cause friction between parties when setting up a transparent and secure data sharing environment.
A potential solution: bank statements
Consumers are more comfortable submitting bank statements when applying for a mortgage. In such circumstances, it is often a norm as bank statements are a requirement for various engagements.
The same bank statements also provide the account information that consumers are reluctant to consent to under the open banking initiative. Thus, open banking services would receive higher consent rates if they requested bank statements on additional customer data.
AI and open banking
Digilytics’ artificial intelligence technology combines computer vision, deep learning, natural language processing (NLP) and machine learning in one go. This makes initial mortgage applications easier for interested borrowers. Additionally, the software provides an incredible advantage to lenders as there is minimal manual intervention, reducing loan application processing times.
As mentioned above, customers are more comfortable submitting bank statements to lenders when applying for mortgages.
Digilytics RevEL works on these bank statements by extracting account information such as name, payslips, account number, etc. The extracted information is then available on a smart dashboard.
RevEL provides detailed solutions based on categorized data and actionable insights. You can access it through APIs or directly through the powerful dashboard.
Actionable insights are developed through the RevEL Smart Accessibility Service, empowering lenders with valuable transaction data and insights. This is then used to design predictive models on the RevEL request. Additionally, the module uses Account score services to enrich the dashboard.
Open banking can significantly improve the current state of banking services and financial processes. However, since consumers do not trust data security by banks for their personal and financial information, there is still a long way to go to become the norm.
Digilytics’ revel in is a potential solution as it extracts information from bank statements and uses this data to assist lenders in customer affordability analysis.