Alessandro Saini
Head of Marketing
Reading Time: 3 minutes
Leveraging Open Banking for Competitive Advantage
Open Banking has helped breach the innovation barrier that was missing in financial services; it has freed up customer data, securely and put customers in control.
All over the world, Fintechs, Big Techs and regulated Third Party Providers (TPPs) are joining the banking industry in Open Banking roles as either Account Information Service Providers or Payment Initiation Service Providers.
Better user experience, data analytics insights, and improved financial services and products are all benefits to customers from the new Open Data sharing paradigm.
New entrants can substantially alter the status quo and disrupt financial ecosystems. Knowing this, it is imperative that incumbent banks fully comprehend the threat these new TPPs in Open Banking pose.
Open Banking TPPs serve as a catalyst for innovation in the sector, forcing incumbents to change. As a result traditional financial institutions must either adopt innovative practices themselves or collaborate with these Fintech firms to stay competitive. Although there are two distinct roles for financial institutions and third-party providers (TPP) in the Open Banking sector, many financial institutions are attempting to play both parts to keep up with this new trend.
Why Banks Should Consider Becoming Open Banking Third-Party Providers
Regulated Open Banking TPPs can access customer data from incumbent bank Open Banking APIs and exploit it to their advantage. As TPPs, they accomplish this with full customer consent and following bank-implemented security protocols for data access.
Financial institutions have often seen TPPs as a danger from the inception of Open Banking, before the introduction of which banks exclusively owned the bank-customer relationship. Most banks also imagined customers data as their own, which over the course of the last few years through privacy regulations such as GDPR and Open Banking, is now clearly not the case. Customer data is owned by customers and Open Banking puts them bang in the middle of being able to control this.
Open Banking allows TPPs to intermediate the traditional Bank-Customer relationship. To understand why banks should consider becoming third-party providers, let’s look at some of the features and advantages of becoming a TPP:
1. To understand the reality of TPP integrations
Most established financial organizations are still having trouble moving past outdated technologies. These organizations will be compelled to broaden their scope to include agile Fintech-style technologies by taking on the role of a TPP. This will make it easier for engineering teams in financial institutions to comprehend how TPPs fit into this ecosystem and what technical challenges they encounter during this process, leading to better FinTech relationships.
2. To collaborate with other banking establishments
TPPs are allowed access to customer bank accounts with their consent. Bank-owned TPPs now have the opportunity to integrate with other financial institutions and create services using data previously not accessible to them. It will be easier for banks to compare their services to those from rivals by consuming their Open Banking APIs, allowing them to enhance their platform and offerings.
For instance, based on the customer’s transaction history from Bank A, Bank B (as a TPP) can present customers with better and more suitable credit products than Bank A.
3. To build a rapport with customers
With Open Banking, TPPs who are Open Banking data consumers will in certain cases be the consumer’s first point of contact for routine banking needs, potentially disrupting bank-consumer relationships. If this keeps happening, incumbent banks risk losing highly valued 1:1 relationships to Open Banking TPPs.
Therefore, banks must keep up with the evolving Open Banking market and ensure they remain on the front lines of customer relationships after becoming a TPP. Without this they risk losing prominent positions in the financial services ecosystem and becoming an infrastructure layer rather than an active participant with customers.
4. To identify weak points
Most financial institutions, Fintech companies, and regulators are still learning about Open Banking principles and technologies. By putting these ideas into practice, security flaws might be revealed.
By using their own TPP programs, Bank-owned TPP applications will be amongst early third parties to integrate with Open Banking platforms, so they can spot vulnerabilities.
The bottom line
Open Banking integration and becoming a TPP is a continuous process. Since its initial launch in Europe as PSD2, Open Banking has both spread globally and extended to Open Finance and Open Data sharing.
Although banks initially saw it as a danger, Open Banking is an excellent opportunity for all parties involved in the financial industry. Financial institutions are attempting to create their own applications or collaborate with third parties to penetrate this new market now that it is accessible to everyone. Due to factors like established community trust and an established consumer base, it is simpler for them to enter the market. Therefore, financial institutions should consider maximizing this opportunity because it has several advantages.