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Open banking is accelerating - but will it be successful?

Author: Serpil Hall


As a large majority of executives aspire for their banks to become “digital ecosystems,” as cited in a recent report by Tenemos and Economist Intelligence Unit (EIU), momentum toward the adoption of open banking practices is accelerating. Application programming interfaces, or API solutions, promise to improve user-experience and profits by connecting banking solutions and enhancing capabilities. Using open banking APIs, Financial Institutions (FI) will offer advanced functionalities like instant remote payment transfer, remote account management, credit score information, and more.

According to a June 2020 report by Tink, 41% of financial executives believe the digital shift caused by Covid is permanent. Furthermore, 65% of financial executives across Europe believe banks need to increase their speed of innovation. However, despite growing popularity and interest in open banking, its success, dependent on full adoption, is in question due to lack of understanding. For banks to effectively integrate into the financial infrastructure, the awareness gap needs to be addressed before transitioning into an economic norm.

What is open banking?

Although there are many definitions of open banking, simply defined “it connects banks, third-parties, and technical providers – enabling them to simply and securely exchange data to their customers’ benefit.” Consumers control the choice to share this information with other FIs or service providers to enhance their day-to-day money management. Open banking allows products and services outside one FI to be accessed on a separate FI provider platform, enabled via APIs.

Open banking makes it easier for consumers to compare the details of current accounts and other banking services across FIs in one place. Via open banking, FIs can develop new online and mobile applications to give consumers, including small businesses, greater visibility and control over their financial affairs beyond banking and into other areas such as investments and insurance.

Open banking has been live in the UK since 2018, but many markets are in the early stages of their implementation journey. Australia is well on the path to drive an open data society through the Consumer Data Right. Many other markets around the world are looking to the early movers to gain learnings to deliver open banking effectively.

New report shows hurdles for us adoption of open banking

As UK Open Banking initiatives gain momentum, Americans lag in awareness among the global community. Still, financial services analyst Charlotte Principato notes in a recent report on Morning Consult, it's more important to understand if they are on board with the mission. The report also reveals 55% of US adults have never heard of open banking, placing America 10th in a list of 14 countries surveyed. Also cited, 63% of Americans worry increased data sharing between FIs will lead to more fraud. These two statistics alone reveal a potential hurdle for open banking in the U.S.

The success of open banking depends on data and enhanced customer experience, adoption won’t scale without it. Great user experience means applying best practices around consent management with secure, but flexible, authentication options to work across multiple channels and use cases. Paramount to success in open banking is the need to understand what open banking entails and the benefits. Similarly, it’s also required that appropriate security safeguards are taken by FIs to ensure privacy and fraud risks are adequately managed.

Benefits of open banking

Open banking can offer an array of benefits for consumers, including

  • Convenience and speed: Consumers can access documents, such as bank statements or proof of income, to easily apply for loans or establish checking accounts quicker.
  • More personalized experiences: Open banking has the potential to allow lenders to review information like payroll data or rent-payment history to determine an applicant's creditworthiness – a plus for those with little-to-no credit history.
  • A clear view of financial health: With a single view of all accounts in one place, open banking pools data sources such as checking, savings, and investment accounts.
  • Operations become simpler for business owners: Advantages include quicker invoice payment, detailed financial data to accountants, and tailored loan offerings.

The fraud challenges of open banking

One of the biggest challenges to open banking is liability. Open banking gives third-party companies access to customer financial data via APIs, creating liability complications in the event of a customer data breach. In addition, transaction volumes continue to increase, opening the door for increased theft and fraud.

Data security and breaches create additional challenges and remain major concerns despite the advancements in the fintech market. With open banking, data would travel among various third-party banking solutions increasing the frequency of access for fraudsters to gain complete account access. This provides fraudsters the ability to collect customer data across accounts to be used in identity theft, account takeover, etc.

What will make open banking successful?

A recent IPSOS Mori survey found 75% of people want access to data on how they spend money. Although there’s a desire for a more seamless approach, success of open banking remains open-ended until the risks are addressed.

AI and behavioral science systems are the latest technology to stay ahead of more advanced cybercriminals who quickly evolve their attacks to accommodate open banking. Factoring in these challenges has been a critical part of the development of the Celebrus FDP, which is designed to identify fraud before it occurs. Having these systems in place can protect consumers from online fraud and financial crimes by identifying fraudsters using their unique behaviors and improving the customer experience via frictionless, and continuous authentication.

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