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Open banking: the rise of a new world of finance

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2020 was the year banking’s digital transformation was propelled further forwards by the Covid-19 pandemic — now, how can financial institutions unlock the full potential of open banking?

By Jan van Vonno, Research Director at Tink

2020 was the year that life’s existing playbook was almost entirely rewritten, as the pandemic swept across the world and societies grappled with what became the ‘new normal’ in almost every facet of life.

The financial services industry was also not immune to these changes. Already at the start of a momentous shift from analogue to digital, and from closed to open — banking’s digital transformation was only propelled further forward by the Covid-19 pandemic. A shift once driven by customer demand for better services, simmering competition and evolving regulatory requirements now became spurred on by the “real” challenge of Covid-19.

In 2020, Tink surveyed financial executives from institutions across Europe to gain insight into their attitudes towards open banking and how they are investing in it. The results showed that financial institutions are primed to embrace the shift towards open banking and open finance, with 61% of respondents saying they are more positive about open banking now than in previous years.

But how can they unlock the full potential of the open banking opportunity?

Map out a clear open banking strategy 

Whilst the majority of financial institutions feel positively towards open banking, 42% of respondents said that they lack a clear strategy to drive value creation. More often than not, this is due to financial institutions not yet fully grasping the benefits of open banking and thus not being best prepared to make the most of it.

Financial institutions where executives can successfully translate the opportunity into a clear strategy will be best placed to receive concrete ROI. However, an appropriate open banking strategy does not follow a cookie-cutter template but is tailored and individual to the institution. 

For example, some businesses are approaching open banking as a long-term strategy, whereas others are choosing to focus on short-term, quick-win value plays. Open banking can, and does, offer the best of both — with excellent short and long-term opportunities for financial institutions. No matter which approach they take, a financial institution’s journey will likely start with the low-hanging fruit or use cases at the start of the customer journey, such as onboarding simplification and improving the KYC process, before turning to more advanced, longer-term use cases. 

Consider use cases beyond compliance

As a result of PSD2, many banks have treated open banking initiatives as a purely compliance-related exercise, with 71% of financial executives revealing that compliance-related use cases are a priority for them. This isn’t surprising as these types of use cases often see returns almost immediately as they improve customer acquisition and engagement.

Yet, some of open banking’s biggest opportunities require financial institutions to go beyond compliance and be bolder and more innovative to reap the largest rewards. In 2021, the winners will be those who invest in use cases that help enhance the customer experience and increase their competitive advantage through offering financial management services, onboarding process automation and multi-banking applications. This will help them stay ahead of the curve and outrun their main competitors, such as payment service providers (PSPs) and challengers. 

Strategically allocate budget

Encouraging signs of open banking adoption are already there — with 31% of European financial institutions spending between €1 million – €49.9 million on open banking initiatives, and 45% spending over €100 million. With the Covid-19 pandemic accelerating the uptake of digital data-driven solutions, this trend will likely continue in the coming years.

To make the most out of this opportunity, budget should be allocated strategically to ensure the greatest chances of success early on. Elementary use cases through which financial institutions can act as a third-party provider (TPP) often have clear outcomes and provide quick ROI. This then wedges the door open to experimenting with, and finding budget for, more advanced and exploratory use cases.

Budget also needs to be evenly distributed across the business — from product and IT, to compliance or marketing. Only then can organisations hope to embed open banking into the fabric of the company, as well as encourage a culture synonymous with success by ensuring buy-in at every level of the business.

Make partnerships the backbone of your efforts 

Finally, it’s important for financial institutions to fully embrace the value of fintech partnerships, which can provide them with the technology and expertise to drive open banking value creation.

23% of European financial institutions surveyed stated that they already have one fintech partnership in existence, and 70% of those currently without partnerships are looking to forge these relationships in the coming months — so the future’s looking bright already. 

Keep in mind, however, that for partnerships to truly work, fintechs must be able to navigate often complicated onboarding and procurement requirements of larger institutions, and larger institutions need to have the processes in place to be able to implement change swiftly and easily. These strategic, high-value partnerships are the key to creating short- and long-term value through open banking — both for financial institutions and their customers.

If it wasn’t crystal clear before the events of the last year, it’s certainly clear now that a new world of finance is rising. As we wrestle with the new social and economic realities of life with Covid-19, it’s vital that financial institutions continue to prioritise open banking in order to support their customers in new ways and provide financial services seamlessly over digital channels. 

In a world of uncertainty, where previously established facts of life can and will change at the drop of a hat, one thing’s for certain — open banking is here for the long-run. 

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