Open Banking and its Wide Range of PossibilitiesBy Nick Grassi | Fri, 04/01/2022 - 09:00
To say that open banking is a model that is revolutionizing and changing the financial system as we know it is not an exaggeration. Until a few years ago in Latin America, it was unimaginable for third parties to access information as sensitive and important as that held by banks and other financial entities in order to learn about and offer better products and services to their users.
However, thanks to open banking, this is becoming a reality. This model not only empowers users and gives them the right to share their information to obtain benefits, it also opens up a range of new and exciting possibilities for both new and traditional participants in this sector.
The paradigm shift represented by open banking drives competition between actors in the financial ecosystem and opens up various opportunities for traditional banks, fintechs and digital lenders, among other entities. This is a win-win scenario and everyone can find positive momentum.
Members of the financial ecosystem can benefit from open banking in multiple ways. Firstly, sharing data allows them to get to know users and potential customers better. This means that companies in the sector can get to know, in detail, their potential customers and current customers through their transactional information and other data.
Open banking allows financial institutions to capitalize on customer data with user permission. Simply put, players in the ecosystem can use this information to transform the insights into improvements to either their business model or their offering, and as a result, grow their business. Before launching any financial product, the first and most important step is always to find out what customers need and find a way to reach them with what they are looking for. Through this open banking strategy, financial entities and nonfinancial actors looking to enter the financial services arena could expand their universe of clients based on their behavior with other institutions.
All of this creates a personalized offer of products and services, where financial institutions can improve the users’ experience and thereby increase their levels of satisfaction, brand loyalty and sales.
More security, cost reduction and new business models
Open banking can be a determining factor in reducing the risk of fraud. Companies that incorporate this model in their operations can obtain the financial information of a credit applicant, for example. Currently, many entities request documentation, such as payroll receipts or statements, which can be falsified.
With open banking, companies that offer this kind of service can check and verify that the information shared from the user is 100 percent true, which reduces the possibility of being a victim of fraud or identity theft. This, in turn, can drive greater approval of credit applications and thereby promote financial inclusion. In short, open banking can drive better risk management for these institutions or platforms.
It also promotes collaboration between different entities to offer more secure experiences and grow together. Financial institutions in Mexico already do this to some extent via the credit bureaus in order to report bad actors and it benefits them all.
The data from open banking can then be used to open new business models whereby new and better-suited services can be offered based on that data. For example, infrastructure players like Finerio Connect, with their financial technology, can become the perfect allies of traditional banking to use their infrastructure and development in order to connect to banks, process data, as well as tools such as Personal Finance Management (PFM) or Business Finance Management (BFM).
This approach enables traditional and new players to offer an innovative suite of products with lower costs and times than what it would cost them to develop their own infrastructure from scratch, launching new products in a matter of months, not years.
There are still many people who doubt the transformative power of open banking. Those who are still not completely convinced should take a look globally at the US$1.5 billion that was invested by VCs in 2021 in open banking startups alone, along with US$6 billion invested in adjacent areas like banking as a service and embedded finance. The future is coming faster than you think.