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Open Banking has arrived

The banking industry is on the cusp of a revolution, driven by open banking parameters and new regulations for entry of third-party providers. Introducing open banking could mean enhancing customer banking experiences, reducing overall costs, diverting investments towards technological advancements and more. This induces fragmentation of existing clustered banking markets, enabling accelerated innovation and development. While Open banking is an ecosystem comprising of banks, third party API developers and regulators that makes ‘customer experience’ more holistic and rewarding, it can be effective though only in conjunction with near-real-time data analytics. Analytics is essential to improve risk and compliance in near-real-time by all players on the open banking canvas.

According to a report by World Retail Banking, more than 78% of banks wish to leverage APIs to improve the customer experience through open banking. These APIs should be scalable and have the ability to track and measure monetization.

Analytics is Key

Open banking will relinquish the control that big financial firms had over the current market using open APIs which makes it easier for third parties to access customer data and create services by plugging in directly to bank systems. These trends and developments in open banking will reshape the industry and drive the adoption of open APIs in the years to come.

It is no longer the data you hold but what you do with it that will deliver a competitive edge and an entrenched role in the customer’s life.

The open banking movement has entered a climate where customer relations is fragile since today, people crave connected experiences and are forever lost as customers when brands fail to recognize them as individuals. Having easy access to a customer’s entire portfolio helps devise new products and bolsters customer experience and innovation. This aids the bank to usher in different methods of customer engagement like a chatbot application for instance that personalizes the customer experience. Redesigning a bank’s customer acquisition model can help create agile machine learning models that can adapt with customers when they are inactive.

PWC estimates that by 2022 open banking will open an opportunity of 7.2 billion pounds. Powered by data analytics, the open banking market is set to take banking to the next stage of improved revenue and better customer experience.

Some Predictions for Open Banking in 2019

  1. Increased Demand for Screen-Scraping: The Regulatory Technical Standards (RTS) of Open Banking have made it difficult for fintech companies to meet the standards due to a shortage of live open APIs. For providers wishing to embrace the open banking system, using account aggregators that furnish solutions based on “screen-scraping” is a possible alternative.
  2. Rise in Account Aggregator Supply: The list of account aggregators in open banking continues to increase. Furthermore, credit bureaus are further pushing for the adoption of account aggregation.
  3. Cost of Accessing Data Will Fall: The vast increase in account data will push for more AISP (account-specific information service provider) licenses and aggregators will bring the cost of account data lower globally. Hence, this would further encourage banks to adopt open banking and invest more in building better customer experiences.

A disruptive threat to Incumbent Banks?

With the arrival of Open Banking, customers will be willing-to-change and willing-to-experiment with new ways to manage their money, borrow, and protect their wealth. While Open banking is good news for consumers, incumbent banks have a risk of being left behind by their customers and hence must act quickly to stay relevant. The winners will be only those who will be data-driven and leverage Analytics to rapidly convert customer insight into powerful new experiences that are personal and add real value to daily life.

Despite the threat of extreme competition, banks do enjoy a clear head start over challengers. In reality, it’s an opportunity for banks to evolve digitally. Being an incumbent, they have at least one clear advantage i.e. access to a sizeable pool of existing customers. By keenly paying attention to their customers, they can gain insights into the products and experiences they want most, now and in the future. While open banking regulations work in favor of the customer, they also ensure that ample data is amassed for the benefit of the banks themselves. From behavioral profiling to strategizing, analytics helps in creating better business plans. Using patented analytics tools, banks can understand a customer’s typical purchasing pattern. From spending velocity to the exact hour of transactions and how customers spend money in relevant risk, pricing and cross-selling models, the algorithms help track the exact purchasing behavior of the customer. By using machine learning algorithms, customer profiles can be created, and their hourly & daily transactional behavior tracked thereby preventing anomalies.

Understanding the patterns help devise methods of improving customer experience, while also maximizing the bank’s profitability margin. This improves customer trust and brand loyalty and increases the chances of long-term customer relationships and profitability. This part of analytics can be personalized based on financial and non-financial parameters, helping clarify customer profiles further.

Real-time Analytics to fight fraud

Even though Open Banking is clearly the way forward, there are certain challenges that accompany this new wave. The added conveniences provided to consumer banking will lead to rising in transaction volume which in turn is likely to make banks more vulnerable to fraudulent and illicit activity. But if you catch fraud in real-time, you have the opportunity to stop it before any big damage occurs. It will take human beings too long to parse and interpret information that reveals fraud, thus Real-Time Analytics-Based Detection is Key to catch fraud. Banks can establish a baseline of normal transaction activity and there on identify anomalies using real-time analytics that could signal potential fraud.

Start today

The harsh fact some of the popular surveys have revealed is that Less than 20% of surveyed banks make extensive use of predictive data analytics to power improvements in the customer experience and operational performance Analytics can help banks become smarter in tackling challenges and analytics services in banking is still in its infancy with a lot of untapped value still left to be uncovered. The overall surge of analytics in banking is increasing and is expected to quadruple by 2020.

Analytic solutions today can predict a bank’s profitability, ensure survival and compliance and further foster growth. Instilling a growth-driven mindset to leverage analytics can greatly improve decision making while also taking other ground realities and challenges into consideration. Banks have a lot of ground to cover in the next five years if they are to retain the customer relationship in the era of open banking.

This “start today” approach is recommended.

About the author

Pankaj Upadhyay

Vice President - Data Science, BI & Analytics

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