PSD2 was first introduced to the world in January 2018 to regulate the payment and finance sector in EU countries. The directive was launched to force big banks to share access to data with third-party providers (TPPs) promoting competition and bring innovation in the financial services. It paved the way to a more collaborative banking model – Open Banking.
The whole concept of open banking is meant to offer better banking experience to users by offering ease of payment and financial transparency. Of course, the new model has to offer numerous benefits to users, banks, and third-party service providers; we haven’t seen any dramatic changes in the economy after its partial implementation.
The relatively infant open banking is expected to add convenience and flexibility for customers driven by broader digital experience and emerging technologies. However, it is not something that can be done overnight. Open banking is poised to emerge as a revolutionary trend in the near future keeping data and technology at its core.
Data: The key to open banking
How to create value for customers through data becomes a crucial factor in the digital economy. For banks and Fintechs, it means establishing an accurate understanding of customers’ financial needs and credit requirements.
Banks have always held vast volumes of data but extracting value from that data is something they have struggled to achieve. With new regulations and more secure APIs in place, the situation is set to change. Open banking will make it is easy for customer data to be shared with third-party service providers (AISPs and PISPs). This access to data will offer them the opportunity to build innovative products and services focusing on the need of consumers.
Why must banks open?
Open banking pushes banks to be technology-embracing and adopting a collaborative approach when it comes to sustaining in the market. Although, the innovative model poses intense competition in front of banks, a plethora of opportunities will be available for banks to expand their ecosystem.
To avail the opportunities, banks must position themselves as a service provider rather than just a data host to Fintechs. With the amount of data and the trusted position they hold, banks can seamlessly deliver an engaging digital experience to customers. For banks, embracing open banking will potentially boost income and pave the way to new streams resulting in a massive upward trend in revenue generation.
Below are some benefits that a shift towards open banking provides for banks:
- Opportunities to be at the center of an open banking model.
- Develop advanced service models to attract and retain customers.
- Build new innovative services with the power of digital.
- Reduce the overall operating cost and generate more revenue.
- Maintain a strong position in this digital economy.
The lifeline to Fintech firms
Dive into the economies, and it’s evident that small and medium enterprises (SMEs) are amongst crucial players driving growth and wealth. Many of them are Fintech firms that are fostering innovation and combatting changes with the help of technology.
Open banking proves to be a whole new way for a lot of startups and businesses to enter the Fintech landscape and be a crucial player in this digital economy. It provides an excellent opportunity to Fintech firms by enabling them to reach a vast audience, understand their financial needs, offer right services, and achieve goals.
While open banking offers dynamic opportunities, sharing highly sensitive data with small firms can be viewed as a risk. The directives including PSD2 and GDPR will make sure that the data is shared with due permission of consumers and security remains the prime concern for every data holding company.
To ensure that, PSD2 has introduced Strong Customer Authentication (SCA) to enhance transaction security and the customer experience in digital payments.
Making the most out of open banking
Considering the opportunities that open banking produces in this economy, more banks and Fintechs are embracing this new banking model. In fact, according to the World Retail Banking Report 2018, more than 78 percent of banks seek to leverage APIs to improve the customer experience.
Open banking represents a huge business opportunity for every player in the financial market. By building a collaborative ecosystem to develop new customer propositions and generate new revenue streams. Consequently, banks and Fintechs will compete with a common goal of providing a better customer experience.
To make the most out of it, they must open themselves up to the broader digital economy to push innovation and disrupt the market forever.