What is open banking and why is it important?
Open banking is one of banking's transformation levers. It entails the definitive entry into the sector in the modern era and placing users in the center by giving them control over their data. But what advantages does it have for customers as well as banks and service providers?
Open banking is a business model in which data can be exchanged in the financial ecosystem. Its legal framework is delimited by the European directive on digital payment services PSD2, which entered into force in Spain on November 24, 2018. This legislation regulates access to payment transactions by third parties with the customer's prior consent.
With this legal framework, Brussels establishes that the information on banking customers belongs to them and not the entities, and, therefore, the bank must allow third parties access to their systems, providing the customer has given consent. These third parties, which do not necessarily have to be from the financial sector, can access the data and the financial behavior of their users, provided that they expressly authorize them to do so.
To make all this possible, banks are activating a technological system through the use of APIs open to third parties.
What are open APIs?
APIs (Application Programming Interface) are a means to connect two pieces of software to each other to exchange messages or data in a standard format. However, they do not only allow standardized interactions between the various participants of the payment ecosystem, but they also promote and enable innovations in the business model.
Thanks to these open APIs, external developers can create programs, tools or apps tailored to the information provided by banks to offer products that are more relevant to customers.
In May 2017, BBVA launched BBVA API_Market, a global and open platform of APIs, thus becoming one of the first large banks in the world to focus on open banking. In addition, it opened its platform to the North American market just a few days ago.
The functionalities available in a catalog that is in constant development include being able to manage, control and analyze payments, verify identity and notify customers, access segmented shopping patterns, know if customers have a pre-approved loan with BBVA as well as their conditions, or aggregate sales data with cards, among other things.
How does open banking benefit the customer?
Thanks to open banking, users and suppliers will take full advantage of the internal market. As is clear from the guide The Open Banking Standard, end customers will have better options to decide which financial products they need and, in short, they will be able to more easily find products that suit their real needs.
Once the characteristics of each customer are known, the provider will be able to better match their profile and send them suitable information and offers.
In addition, thanks to open banking, users can have data from multiple accounts, cards and banking products of different entities together in a single app.
In such a way, thanks to the possibilities of open banking, the customer experience is improved. For example, with the creation of online financial services and insurance catalogs operated by various banks and financial operators. With them, customers can manage their finances openly, moving their data and reservations between different offers. In summary, it is about always being able to choose the best option with total transparency. In this article there are more examples of how open banking improves the customer experience.
The equation is simple: the more innovative the bank, the more attractive it will be for financial technology companies -so-called Fintechs- and that will mean that the customer will have priority access to the forefront of the industry and to more relevant offers.
Is open banking a threat or an opportunity for the sector?
As one report published by the global strategic consultancy McKinsey & Company warns, the reality is that banks should address the possible loss that occurs when reducing barriers to competition. "Change is rarely comfortable, but as market evolution in the United States and other countries illustrates, the forces of change are inevitable. Banks are better served getting ahead of and defining the trend rather than waging a futile battle to repel it." the document reads. So it is vital to lead the process, as BBVA does. The company was recently awarded for its push toward open banking thanks to its API platform, BBVA API_Market.
However, despite the risks and efforts that all innovation implies, the forecasts for the banking industry with the leap to open banking are good. According to an Accenture study, banks that embrace Open Banking will profit from a potential revenue uplift of 20 percent, whereas those failing to do so risk losing 30 percent to disruptive industry players by 2020.
Open banking is a challenge that, as Daniel Leniado, CEO of Accenture for the banking industry in Latin America, wrote in Forbes, is worth taking on: "This is a call to action for traditional banks to take advantage of this window of opportunity to create compelling technology launches, link up with the new players in the ecosystem and bring together a community of developers to be better positioned before non-banking companies make their move."
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