5 ways in which Open Banking is helping Banks to join forces with Fintechs
In the last decade or so, fintech and banks have been acting as rivals with each other. Fintech trying to get access to banking data to get customers insights, bank’s reluctance to share that data in order to sustain in the hugely competitive world. Amidst all this, European Union implements Open Banking under which banks have to share data with authorized third-party payment providers (TPPs) like fintechs to develop services upon it.
The initial approach of banks towards Open Banking was not so positive and they were again reluctant to share the financial information about their customers. However, fintech and banking collaboration is mostly a win-win situation, lets understand the why and how.
Why should banks joins hands with fintech?
- Both can increase their customer base.
- Fintechs can take advantage of the huge customer information that banks have to offer unique services
- Instead of competing with fintechs, banks can focus on their core services
- Banks can be popular with the Gen Z with the help of fintechs
1) Security
Accenture published a study in the year 2017, where it was mentioned that about 2/3rds of customers in the UK didn’t want to share their financial data with non-bank providers. One of the main reason cited for the disapproval of sharing data was security concern. With Open Banking, Strong Customer Authentication has been implemented under PSD2. Every customer initiated transaction will be processed under three steps which are:
- Inherence: something which is limited to an individual user, like fingerprint or an iris scan.
- Possession: something only the user has, such as a token or a credit/debit card.
- Knowledge: something only the user remembers, like a PIN or a password.
Despite the PSD2 program assumptions about increasing the innovation and safety of banking services, most banks choose to send SMS as an additional layer of security in the SCA process. Nevertheless, text messages provide neither integrity nor confidentiality of information.
2) Building on strengths
The banking sector for as far as we could remember have stayed the same. The core banking services remain the same for people at large and there have been limited development in terms of individualistic or customer specific financial solutions. As of now neobanks and fintechs have come into the race, challenging the banks with offering customized solutions and services. By collaborating with fintech, banks can seize the fintech’s strength, become better, stronger as well as more trusted by their customers. Bank, fintech collaboration will also allow the banks to quickly evolve according to customer expectations, cope up with digital challengers and low interest rates as well as meet the regulatory scrutiny.
Strengths of Banks
- Strong customer database
- Government Entity, trust and stability
- Experience with regulators
- Core product line
Strengths of Fintech
- Innovation and agility
- Advanced technology expertise
- Focus on specified products
- Customer-driven services
3) Government Support
Open banking which falls under Revised Payment Services Directive (PSD2) is administered by the European Commission governing payment services in the internal market. This has allowed authorized third-parties (in this case Fintechs) to get hold of bank’s customer data through APIs. FCA last month published a 38-page ‘call for input’ on Open Banking. The survey consisted of 22 questions including — if there is a “natural sequence” by which open finance would or should develop by sector, also whether the current regulatory framework is in itself sufficient enough to capture the potential risks.
In another effort OBIE, whose trading name is Open Banking Limited recently launched an online app store to promote mobile powered open banking applications. The aim is to nurture the Open Banking ecosystem and promote a level playing field for banks and fintechs. The store lists about 51 apps (reporting time) that offer solutions such as payments, borrowing, accountancy and tax, financial advice, and more.
4) Standard on-boarding process for TPPs
With PSD2, the contract between fintechs and banks have been standardized. This not only makes it easy for both the parties but also adds security to the open APIs. One such approach which is available in UK is Dynamic Client Registration (DCR).
5)Standardized APIs
The authority governing the smooth flow of open banking in each region or country provides a specification that needs to be followed by banks when exposing their data as open APIs. All regulated and participating banks must adhere to these specifications. This makes it easier for fintech firms to integrate data from many banks. Some of the problems faced due to not following a standardized API specification are:
· The time taken by developers to devise ways to talk to the different APIs held by different banks is too long.
· Extended R&D processes based on this will also lead to an expensive process making it unprofitable.
· The absence of a performance standard will affect user experience for both the TPPs and end-consumers.
· Without these matters being standardized, the end-user experience would not be good and the system would fail even if the API template was up to a certain level.
