Open Banking is flashing bright – what problems can it solve?

January 2019 marks the first anniversary of Open Banking, aimed at improving competition in the retail banking market.

It all started with the European Union’s objective to create a unified payment area where all local and international non-cash transactions can be made as easily as within national borders and at standardised rates. This evolved in Payment Services Directive 1 (PSD1) and Payment Services Directive 2 (PSD2), the latter of which has just come into effect.

In parallel, in September 2015 the UK set up the Open Banking Working Group (OBWG), to explore how data could be used to help people transact, save, borrow, lend, invest their money, and ensure their data is secure. A couple of months later, OBWG published The Open Banking Standard, to guide how Open Banking data should be created, shared and used by its owners and those who access it.

Put simply, Open Banking is a set of rules that gives the user access to information from different financial institutions (banks, payment service providers, insurance companies) through application programming interfaces (APIs). With Open Banking, you are able to see your current accounts at different banks all in one place. Even more convenient is the fact that switching from one provider to another, opening or closing accounts and payment initiation are all much easier.

Open Banking – but for whom?

From online financial services, insurance catalogues and foreign exchange solutions to aggregation apps, personal identification and loyalty schemes, many customer experiences are starting to see the effects of PSD2, just months after it was introduced.

Paying for a taxi with your bank-provided P2P app? Buying a last-minute offer flight your bank notified you about, with travel insurance set up by that bank? Viewing all of your multiple accounts in one place with the best overview of your finances? One-click-away services have all become easier as the regulation enables third parties to provide new services by granting access to customer bank details.

So who wins in Open Banking?

And the winner is… the banks, of course, but not only them. For banks, the prize comes through integrating themselves into their customers’ daily lives through digital. By helping customers manage their finances, anticipating their banking needs and helping them make better decisions, banks can deep-dive into being trusted advisors, which will ultimately lead to customer retention and increased product upsell and cross-sell value.

For service providers and merchants, Open Banking promises to remove some of the hassle of registering new customers, increasing loyalty with new and existing customers, and completing purchases. It might also help build highly targeted offerings and deals based on a customer’s own past purchasing behaviour.

For retailers, Open Banking enables the possibility to build richer customer experiences. For example, by embedding APIs in their existing point-of-sale channels (in-store and online), they can enable account information services, such as current account balance display, electronic receipts, and transaction history. Moreover, retailers will be able to initiate payments directly with the customer’s bank. This means better transaction processing fees and faster clearing of funds. Generating point-of-sale offers and discounts based on consumer spending habits and loyalty is a huge win.

Meanwhile, fintechs are setting their sights on new services and products. These are aimed to spur banks to compete in a space where they have been slow to innovate.

Adding value on the corporate side

Much of the focus so far when discussing Open Banking has been on the retail market. But value-creation can be just as big in the commercial banking side.

The Open Banking wave that is delivering novel services to retail customers holds great promise for small- and medium-sized enterprises (SMEs) and large corporations. Based on findings from Accenture’s Open Banking for Businesses Survey, in November 2018, 77 per cent of SMEs and large corporations were already participating in Open Banking ecosystem platforms, or planned to do so by 2019. They expected to partner with third-party providers (TPPs) mostly around payments, expense management and B2B services, and more than two-thirds were interested in joining Open Banking ecosystem platforms with banks.

Likewise, more than 80% of banks already invest in Open Banking use-cases for SMEs and corporates, or plan to do so. Nearly 90% are ready to build an ecosystem platform with third-party services for their commercial customers.

Banks are likely to achieve greater value in the corporate banking market where APIs assist with cash and liquidity management. This is particularly interesting for companies with operations in several countries. Payments, finance and cash management, accounting, bookkeeping and taxation are all areas of business that could be improved in partnership with their bank.

For treasury, specifically, it means de-risking the cash flows. Open Banking presents a powerful tool for corporate treasurers, especially when it comes to cash visibility. The integration of APIs with existing treasury technology will bring real-time functionality and enhanced visibility. Moreover, it will speed up the fulfillment of transactions, while enhancing customer relationships. Open Banking is also an opportunity for corporate treasurers involved in supply chain finance and working capital management, as it will take a lot of complexity out of these processes.

Lastly, Open Banking could address know your customer (KYC) issues. For example, you can send all your information from a bank where you are already set up to a new one you want to join, confirming your identity as a trusted customer. It should also help corporates mitigate risks by providing fraud detection alerts, systematising and automating processes while staying compliant with global policies. Gathering real-time data from corporate customers can enable banks to participate more effectively in day-to-day business operations, and banks can interface with corporate customers’ ERPs to gain real-time insight into their customers’ business operations.

Ace up your sleeve, bank!

In the Open Banking era, banks will be able to present customers with a diverse menu of options. It’s up to banks to fuel the Open Banking momentum and draw on it to benefit commercial customers.

What can banks do to stay relevant for retail and commercial customers? Here are some clues:

Identify and understand corporates’ needs and trends within the corporate liquidity management ecosystem, and understand which of these needs will be solved with Open Banking

Partner with other banks and fintechs to fuel efficiency, speed and value

Identify API monetisation techniques

Monetise data (map out ways to leverage data, analytics and insights to grow revenue sources)

Improve structures for innovation and monetise existing business capabilities

Consider new innovation methodologies and create new products and services

Enhance their value proposition to customers by partnering with TPPs (fintechs, service providers etc) to offer new products and services

Offer banking-as-a-service (using APIs to amplify the power of distribution and the ability to connect to multiple banks).

…and many more.

In the meantime, we can expect a rush of interesting uses cases in 2019 to make Open Banking more tangible and attractive to retail and commercial customers. Obviously, it’s going to be fascinating to see how this plays out, not only in 2019, but over the next few years as well.

This article was first published in Business Reporter`s Future of Banking and FinTech report HERE.

About Oana Ifrim

Oana Ifrim is Senior Editor at The Paypers and explores topics spanning B2B payments, supply chain finance e-invoicing, and related subjects and topics. She is a passionate observer of banking innovation, with a penchant for fintech - always keen to identify and understand how new technologies and digital strategies and solutions are shaping the future of banking. Oana holds a Master’s degree in American Studies.