As the financial services landscape evolves along with customer expectations, open banking can position institutions for the future and allow them to respond to those changes with technology partners assisting them along the way.

Open banking allows third-party technology developers (like a core technology vendor or specialized fintech) to access a bank’s data and provide it with specialized products. Banking data is no longer confined within an institution’s walls. With open banking, financial data and capabilities are everywhere.

Exploring Open Banking

While confusion may exist over the terminology, open banking is an umbrella term that encompasses every banking use of Application Programming Interfaces (APIs) to share data. This software is familiar, and some banks may be surprised to know that, although they haven’t referred to their practices as open banking, they’ve embraced the model for years.

Open banking APIs enable many different services through bank data exchange, including financial services like payments and account management, embedded credit score ratings, onboarding identity verification and many more. In short, they enable the digital banking services that today’s customers expect while simultaneously adding technology to aid employees with backend processes.

The most common open banking strategy is banking as a platform, also known as platform banking. This model involves a financial institution connecting new technologies (typically from its core technology provider) to its central enterprise core technology.

Banking as a Service (BaaS) is another open banking application that has recently gained steam. BaaS uses the foundation of open banking to enable banks, their core vendors and a nonbank organization (often a fintech) to create new financial products or provide financial products in new environments. Neither platform banking nor BaaS are synonymous with open banking. Instead, consider each of these models as an example of what open banking can do.

What Open Banking Offers Financial Institutions

In today’s competitive landscape, financial institutions must be flexible and adaptable. Open banking offers financial institutions adaptability, enabling them to:

• Incorporate new technologies — Financial institutions may not always have the time or resources to build new digital products, so connecting with a technology provider helps them more easily “plug-in” new offerings without needing to develop them internally. Transforming the core into an upgradeable platform also enables institutions to add modular features — like video chat, digital account opening or real-time transfers — much faster.
• Consolidate and use data — APIs create a “universal language” to share data, which can connect all banking systems and processes in real time. With centralized behavioral and transactional data accessible by CRM and analytics dashboards, institutions can better determine customer needs and even use journey mapping to determine where potential customers are lost.
• Automate backend processes — By consolidating data from previously disparate systems, financial institutions eliminate dual data entry and gain time to focus on customers. In addition to decreasing the likelihood of mistakes, open banking can also offer pre-built workflows and task automation. For instance, an account opening system connected to an open platform can automate data entry for returning customers and use auto-decisioning to review credit and fraud risks.

What Role Does Banking as a Service Play?

Fintechs and other technology companies once were considered almost entirely as competition in the banking space. However, the expansion of open banking has reimagined that competition as potential collaborators who can ultimately support the institution and the end consumer.

Opening bank data to third parties increasingly enables institutions to co-create new financial products or allows nonbank organizations to offer their financial services. For these institutions, pushing open banking to its next step — otherwise known as BaaS — unlocks new markets or revenue streams.

The BaaS marketplace is complex and growing every day. But the general premise is simple — each player has something to bring to the table in the ongoing effort to create new customer experiences. When providing BaaS, financial institutions function as experts in risk and regulation that trust their core service provider to offer traditional banking services to businesses, customers and other banks. That service provider operates as a facilitator that can assist in vetting other third-party technology providers. Each party gains revenue when consumers use these new financial products.

Technology companies bring their expertise in creating innovative product offerings through data and technology. Some technology companies exist specifically for the financial services industry (fintechs). Others provide services that are not specific to banking yet are beneficial to financial services, like cloud security, chatbots and data tokenization. Through BaaS, these companies gain the use of a financial institution’s regulated infrastructure to sell their technologies.

The BaaS market is full of opportunities that financial institutions should keep an eye on. Likely, the next game-changing open banking applications will originate from the BaaS model.

Driving an Open Banking Strategy Forward

As with all significant decisions, research into an institution’s particular open banking strategy and investments is critical. Financial institutions that wish to work with third-party technology providers must do their standard due diligence to qualify vendors.

Read CSI’s white paper, Open Banking and Banking as a Service: Opening Opportunities, to further explore how open banking is transforming the banking sector, unlocking a growing BaaS market and creating new opportunities for core providers, financial institutions, fintechs and customers alike.