Open Banking: What can it solve?

A quick intro to the open banking paradigm and a look into how this can help optimize customer experience with their financial products

Image from Elise via The Plum Basket

What if I told you there was a problem with the way banking works in today’s world? Especially around the breakdown in information flow that occurs between our bank and all other organizations who need information from our banks. We are expected to provide so many other trusted financial service providers & merchants with information from our banking products, yet we have to act as the middle man for almost all of these requests. As a customer, I want to be able to have an instantaneous, secure flow of information from my bank to other trusted third-party companies and vice versa, so that I save time and obtain the most value from all my financial products.

How can we solve this problem for our customers? Working at a bank, I do understand the amount of beneficial information they have on a customer. As a data enthusiast, I can’t help but fantasize about the kinds of problems one can solve by leveraging the data if they have access to it. What if there was a way to make banking more accessible and efficient in a secure manner? What potential opportunities to enhance the customer experience does this unlock?

Enter open banking.

What is Open Banking?

Open banking is the concept of allowing third-party companies secure access to data associated with a customer’s financial products and banking services, to enable them to build products/services that enhance the customer experience.

The current proposed solution is to do this by establishing APIs (Application Programming Interfaces) that registered third-parties can use to access customer financial data from a bank’s systems. They can be provided with read and write privileges to a financial institution’s systems, with the requests covering consumer account data, transaction data or even payments data.

Image by Marcus Spiske via Unsplash

If you have any more questions on how exactly it works, its benefits and its drawbacks, here is a great article written by Kalana Wijethunga explaining it.

What problems can you solve with Open Banking?

This is the question that interests me the most. Banks can learn from tech giants like Amazon or Uber when it comes to leveraging this data to benefit the customer. Both Amazon and Uber provide a platform on which they connect their customers and a specific customer need — physical goods in the case of Amazon and car rides in the case of Uber. With open banking, banks could act as the platform that connects their gargantuan customer base with financial service providers (insurance providers, merchants, lenders, etc.) to allow customers to benefit not just from the core banking products they hold, but also an entire suite of financial tools built by others. Open banking introduces a secure flow of information, both into and out of a financial institution’s systems, with the ultimate focus being on the customer. What problems can this solve?

Payments

Today when you make a purchase, you use a card as a token to identify your account and rely on a payment processor (like Visa or Mastercard) to facilitate that transaction between the merchant’s bank account and your bank account, which can take somewhere between a few hours to a few days (that’s why we see pending charges on our cards).

With direct access to a bank’s systems via open banking, the merchant bank & your bank can facilitate that transaction themselves via API calls on real-time payment rails (instead of the traditional card rails). The payment could be initiated by the you via a mobile app, instead of a card, at the time of purchase and the transfer of funds carried out in real-time, saving you time and unnecessary pending charges.

Third Party Financial Services

Lenders, brokers and insurance providers all rely on your banking data to be able to provide you with a service. Today you have to authorize use of your information and either transmit it yourself (literally send statements over) or initiate the transmission from bank to third-party and wait for processing on either end.

This is a transmission flow that can be simplified with open banking. Third party financial service providers could directly interface with the banks’ systems to obtain the necessary data and analyze this data to provide you with the best possible service or product. The bank acts as the platform where you gain access to a world of financial services built to best suit your needs as a customer, while other financial service providers use it as a platform to obtain data to best shape the products/services they build for you as their customer.

Aggregate View of all Financial Product Data

Today many customers have multiple bank accounts with different banks, multiple insurance providers, multiple lines of credits with different lenders. As a customer, you have no consolidated view of all your finances.

With open banking, you could build a solution that does just that — communicates with the various banks to obtain and present that information in one consolidated real-time dashboard. A single view of all your finances (maybe even with detailed analysis) so you can best understand it all.

All this sounds great, when can we start?

Technically, the open banking paradigm has been set in motion in different parts of the world already. In UK and Australia, the government set it in motion by passing laws mandating banks comply with open banking. In the US there isn’t a standardized framework in place, but new players like Plaid and Finicity are acting as the trusted intermediaries between banks and third-parties to provide these services.

In Canada, there are a few frameworks and tools that allow customers to consent to the use of their financial information by third-parties, however, banks have not yet made moves to adopt this paradigm completely and likely will not do so till regulation mandates them to.

In a world, where people rely on multiple apps and tools, and stand to save time and effort if provided with an integrated, connected workflow all the way through, open banking can pave that benefit for us in the financial space. It’s not a matter of if but when this future becomes a reality, unlocking the world of possibilities with it.

Product, Data & Tech enthusiast || Product Manager — E-commerce