In this article, we’re going to focus on the advantages of open banking for both consumers and businesses. We’ll look at how to navigate the range of opportunities in this brave new world of banking, finance, and customer experience.
What is open banking?
Open banking is a financial services term that primarily refers to the liberalisation of financial policies, which began in the mid-2010s. It mandates easy, secure data sharing between banks and Third-Party Providers (TPPs), and promotes fairness in the banking sector. It accomplishes these by enabling consumer control over data sharing and access.
With open banking, consumers can manage permissions over who accesses their data. This in turn allows providers to utilise that data for open banking-powered services such as payments, aggregating finances, and affordability decisions.
Despite its prevalence in the EU, open banking legislation varies globally. So, Open Banking Limited, a UK-based organisation that sets standards for technology, works to enforce PSD2-compliant technology among service providers.
What is PSD2?
The second payment services directive (PSD2) is an EU directive that serves as the foundational regulation for open banking, with which it is often equated. It necessitates that banks provide user financial data to alternative service providers.
It also introduced Account Information Service Provider (AISP) and Payment Initiation Service Provider (PISP) as entities for regulating open banking rules. These are managed by national regulators across Europe, like the FCA in the UK and BaFin in Germany.
Who does open banking benefit?
Open banking benefits four main parties:
- Consumers
- Businesses
- Third-Party Providers (TPPs) of financial services
- Traditional banks
There is both overlap and divergence between the benefits open banking brings to each party.
For example, banks don’t directly gain from being the exclusive custodians of customers’ data. However, they do gain from collaboration with third party providers. And consumers and businesses gain from both this increased competition and collaboration.
The advantages of open banking for consumers
1. It gives more control
Open banking enables consumers to simply and securely control their own data. This means that consumers are in control of which financial service providers access their data and for what purpose. Prior to open banking, the ability to do this was both limited and highly complex.
2. It gives more options
The control of data open banking gives consumers brings with it more options for them to utilise it with. They can quickly and easily switch providers and new providers appear with increasing frequency as the market grows.
3. It gives cheaper services
Open banking reduces transaction fees in numerous ways. The primary way it does this is via the increased options it gives consumers. Customers are able to compare different providers directly, so providers often need to compete with one another on price in order to gain market share.
4. It gives better quality services
Open banking develops the financial landscape by improving the quality of services and service providers competing in it available.
Providers of innovative financial solutions are forced to improve their offerings as well as customer satisfaction and customer engagement.
This means that the open banking customer journey is consistently analysed and refined. The result is improved banking and payment user experience.
Providers of innovative financial solutions are forced to improve their offerings as well as customer satisfaction and customer engagement.
The advantages of open banking for businesses
1. It drives operational efficiency
Open banking drastically reduces reliance on manual processes by automating identity and income verification, reconciliation, and payroll-related tasks (to name a few). This in turn saves companies valuable time and money and reduces the risk of fraud and late payment.
Furthermore, the methods through which operational efficiency is realized are continually evolving. Innovation is a hallmark of open banking, after all. Below are some of the main ways in which it is currently achieved.
API response times
Our own research found that API response times have become quicker despite payment volumes getting larger. Between 2020 and 2021, all of the top 10 UK banks improved their API response speed, in some cases by up to 37%.
Know Your Customer (KYC) checks
Every day, companies run thousands of KYC checks. They can take days — or even weeks — to be completed…
But with open banking, compliance teams can verify and onboard new customers in minutes. With products like Yapily Validate, With products like Yapily Validate, businesses can quickly access data on bank account information, balances, transactions, and account details.
Reconciliation
Open banking streamlines reconciliation processes by accurately pre-populating payment information. Without this, reconciliation can be difficult, especially for companies handling large payment volumes.
Instant settlement
With Instant Payments, funds settle instantly. This enables businesses to access funds for better liquidity control, which foster trust and builds stronger business relationships.
And with better visibility and control of their real-time cash position, businesses can make more strategic decisions around their working capital and ensure predictability and reliability between customers and suppliers.
Payroll
Individual payments can be relatively painless for companies, but batch payments… not so much. Open banking lets businesses orchestrate bulk payouts, such as processing payroll, within their platforms.
2. It drives revenue
Open banking helps businesses increase revenue in a number of ways.
To start, it helps them break into new markets. It does this by reducing barriers to entry for newcomer businesses. One of the main ways it does this is by making compliance with standardised regulations easier.
Open banking also helps with customer retention and loyalty, too. Here are just a few examples of how.
For lenders… access to data is automated and customers only have to re-consent every 180 days. Parameters can be set up to trigger alerts that can lead to proactive discussions, so customers won’t fall behind on their payments.
For digital banking… customers can combine their bank accounts and centralise their financial data in one place. Rather than flicking between multiple accounts, they can easily check their spending, balances, savings (and more) from one dashboard.
For payment services… the checkout experience is seamless since customers don’t have to enter their card details. What’s more, access to data can be used to personalise reward schemes and foster customer loyalty. And open banking brings with it the benefits to being a first mover or early adopter. In times of economic turmoil, businesses tend to play it safe. In fact, research shows that companies that invested in innovative technologies grew revenue five times faster over the pandemic.
3. It helps reduce the risk of data breaches and fraud
Services powered by open banking are designed to keep data safe. In fact, open banking began as a response to evolving security risks. This is now more important than ever, given the average cost of a data breach has soared to nearly £4 million…
The old way of doing things - screenscraping - allowed service providers to access online banking interfaces to pull data. Hello fraud risk 👋🏼 But with open banking, financial data flows through secure pipes called application programming interfaces (APIs). Third-Party Providers - who must be licensed by the Financial Conduct Authority (FCA) - need consent before accessing it.
Likewise, payment rails are built on top of secure banking infrastructure and use the same encryption and security protocols as online banking. They’re also regulated by government bodies who ensure that third parties are following strict guidelines for protecting customer data.
Learn more about security in open banking.
Yapily’s open banking solutions
At Yapily, we have a range of products and services that help businesses tap into the many benefits of open banking.
Products like Yapily Bulk Payments empower companies to make multiple payments from a single bank account to a list of recipients in one transaction, from a phone or a computer.
And our API gives customers access to over 2,000 banks and other financial institutions across 19 regions. And it has the strongest coverage across retail, business, and corporate accounts. * Want to explore more open banking use cases?*
Conclusion
Open banking is a transformative force in the financial landscape, permanently reshaping banking and financial services.
It fosters innovation and empowers consumers, businesses, and banks. Control, choice, and enhanced user experience are its keystones.
At the heart of this transformation, customers are experiencing unprecedented control over their financial data. This opens doors to a range of options and more cost-efficient, as well as higher-quality services.
Businesses, too, are reaping the multifaceted benefits of open banking. It’s driving operational efficiency, security, revenue generation, and customer retention.
Open banking is sculpting a future where the synergy of control, innovation, security, and efficiency is central. This in turn is paving the way for a more transparent and customer-centric financial ecosystem.
And as the map for this financial landscape continues to grow and change, new possibilities and experiences will continue to emerge.
