Open Banking as a Main Fintech Trend: How to Leverage the Innovative Solution for your Business Growth in 2021

Open Banking as a Main Fintech Trend: How to Leverage the Innovative Solution for your Business Growth in 2021

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Open Banking is a trend that is transforming the banking sector

Technology can be both a beauty and a burden at the same time, and every sector has witnessed thetransformative power that technology holds. Recent open banking trends offer services that manifestthat power. Companies like Boston Unisoft Technologies keep developing services that question thereasons why we need banks. But they also bring innovations that facilitate the progress of banking.

Recently, you may have noticed that trends in technology are leading towards an open bankingecosystem, which, if adopted, offers more collaboration than the competition for open bankingopportunities for banks. Open banking is a fintech tool that promotes informed product provision. Itachieves this by making consumers’ financial information in their banks available to third-party openbanking providers.

After the first step for the open banking marketplace was taken in the UK, the progress of the conceptacross different regions differs. However, open banking use cases witnessed their highest growth withthe global spread of the COVID-19 pandemic.

Market Forecast for Open Banking

According to the open banking report by Allied Market Research, in 2018, the global market growth ofopen banking was valued at $7.29 billion. The Research predicts that the open banking global market willhave grown to $43.15 billion at a CAGR of 24.4% between 2019 and 2026.

Open Banking Definition

A simple way to define open banking is a concept that grants third-party service providers access toconsumers’ data from financial institutions to facilitate informed services. Also known as ‘open bankdata,’ the efficiency of the open banking customer experience is powered by digital solutions that relyon application programming interfaces (APIs).

The concept of open banking is based on the idea that consumers’ data can be made more fluid,transparent, and available for parties to make more informed decisions. Through this access to data, third-party service providers will be better equipped to innovate realistically around the rigidities in the bankingindustry.

Open Banking Definition

Open Banking History of the Development

In 2015, the European Parliament took the first major step towards open banking innovation byadopting a revised Payment Services Directives (PSD2). The revised PSD2 included additional ruleswhose purpose was to promote the growth of open banking initiatives through the development ofonline payment.

While noting the pros and cons of fintech, the Financial Inclusion Centre of the UK also stated thedisappointing reality that only those who are tech-savvy will enjoy the open banking customer journey.

Notwithstanding the criticism, in 2016, the Competition and Markets Authority ruled for banks to grantdata access to startups with open banking certification. This directive came into force in January 2018,and by January 2020, the UK’s banking industry had 202 service providers enrolled in open banking.

Given the perceived risks, the open banking global landscape shows the concept has been accepted inthe UK more than in any other region. However, the conditions brought about by the worldwide spread ofthe covid-19 pandemic present the need for these regions to reconsider their positions on open bankinginnovation.

Open Banking History of the Development

How does Open Banking Work?

Like every concept, open banking functions through a set of principles tailored to its purpose.

Principles of Open Banking

Open banking runs on three main principles:

  • Sharing of Data in Real-time: this principle involves granting real-time access to customer bankstatements or transactional data to open banking service providers.
  • Real-time Payment Initiation: third-party service providers can initiate payments withDebit/Credit cards because of this principle.
  • Provision of Information on Products and Services: this principle allows you to drawcomparisons between products and services available to you.

What is the Purpose of Open Banking?

The purpose of open banking lies at the heart of why the banking industry would grant access toconfidential customer information. In addition to the flexibility of the open banking marketplace, theconsumers also reap the benefits of product varieties. They enjoy a deeper understanding of their accountsand appreciate the potential investment options for their monies.

What are The Benefits of Open Banking

Regardless of open banking security concerns and other criticisms, the benefits far outweigh thedownsides. They include:

  • Supporting consumers in their operations: Open banking innovation is consumer-centric. Itbreaks the traditional practice of conservative banking by inviting third-party service providers toshare consumer data to create better products.
  • Services centralisation: This benefit follows from the open banking principle that allowsconsumers to compare different products and services to determine what works for them.
  • The financial market boost: open banking affords the luxury of convenience. The mere fact thatyou must not visit the bank before conducting transactions has caused a financial market boostthat questions the reasons why we need banks.

Open Banking's Drawbacks

You may wonder what drawbacks your business might encounter with open banking. Aside from thetrendy question about open banking security profile, other drawbacks circulate mainly around:

  • Low customer confidence: You know, on the topic of privacy, customers like what theyunderstand. The open banking ecosystem is currently an idea that many customers are yet tounderstand how it works, especially sharing personal data with third-party providers. Customerignorance and scepticism are some of the significant drawbacks to open banking.
  • The fintech: Open banking platforms are still provided by small fintech startups and not giantcompanies. Most customers who have accepted open banking innovation still worry about thesecurity of the systems.
  • Lack of close customer communication: Open banking service desks have proved reliable.However, customers can do away with face-to-face banking experience for only so long until theystart the originality of human experience once again.
Open Banking's Drawbacks

Is Open banking safe?

You would expect any serious service provider to lay the architecture of his technology on the foundationof open banking security.

Open banking is secure because authorities regulate it in the different regions where it is operational. Forexample, in the UK, the Financial Conduct Authority (FCA) has open banking data standards. These standards stipulate the open Banking specifications that service providers must satisfy before they canpractice open banking.

Remember also that open banking is essentially Banking as a Service (BaaS). This means that the APIs through which data is shared to third-party service providers still have their endpoints built into the banks.

Possible Risks of Open Banking

You know that perfection is always a work in progress. Notwithstanding the level of security afforded byregulatory authorities and APIs, open banking risks include:

  • Banks might go obsolete: third-parties who offer BaaS are generally more innovative andflexible. Banks are at the risk of losing their customers to them.
  • Fraud: open banking presents a loophole for data protection violation, theft, and financing ofcriminal activity.
  • Data manipulations: open banking has made data hacking easier.

Conclusion

Despite imperfections in open banking, fintech is ripe with enough benefits to encourage deployment.

Who should use Open Banking?

The bigger picture of open banking innovation presents the banks, consumers, and service providers asthe key players. These three players have benefits to derive from the use of open banking.

  • The banks: Open banking helps banks stay futuristic with data management, customerengagement, and collaboration with more innovative service providers.
  • The consumers: Open banking makes BaaS possible. BaaS affords consumers the convenienceof open banking customer experience that banks alone cannot give them.
  • Service providers: Fintechs offering open banking APIs, like Boston Unisoft Technologies, havethe market to provide their services.

Regulatory authorities like the FCA have an open banking directory listing businesses permitted to offerBaaS through open banking APIs for security purposes.

What makes open banking so important?

To appreciate open banking, you might need to consider the pros and cons of bank regulation. Openbanking is essential because it loosens the rigidity of the traditional conservative banking system byoffering Banking as a Service (BaaS) through multiple channel third-party APIs. These APIs affordconsumers the open banking customer experience of more products and services.

Boston Unisoft Technologies is a company specialized in the development of fintech solutions like openbanking APIs. To benefit from online banking opportunities, contact our open banking service deskhere.

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