Open banking is continuing to gain steam in 2022, which will put financial institutions on a trajectory that could transform the relationships merchants have with their banks. Not only will this innovation spur new, highly relevant digital services, open banking can benefit merchants by eliminating chargebacks as well as the risk of non-payment. Merchants can expect real-time payments and real-time confirmation, which improves conversions and benefits consumers. Ideally, open banking will create more competition, leading to better products and more tailored consumer services.
With a customer’s permission, open banking allows banks to share data with third parties, bringing greater transparency involving the consumer’s data and money. The United States has been a laggard in terms of shifting into open banking, compared to other countries that have mandated the use of open banking. To play catch up and implement open banking in the U.S., we first must understand what that entails—and why it is crucial in 2022.
A typical open banking transaction would involve a consumer selecting a payment option that involves a payment initiation service provider (PISP). Through open application programming interfaces (APIs), the PISP verifies the customer and requests permission to initiate payment. The customer then approves the transaction and sees the debit on their bank account. Because the PISP uses strong customer authentication (SCA), the transaction is more secure and less susceptible to fraud.
Open banking will depend on cultivating trusted relationships based on strict regulations and highly secure data-sharing technologies. If done correctly, open banking could give banks new opportunities, creating fresh revenue streams and allowing them to forge deeper and more valuable relationships with their customers.
With the continued push for third-party integrations for consumer banking, the time for financial institutions to implement a strategy for open banking is now—but implementing that plan in a timely manner is a whole new beast. Mounting pressure for financial institutions to keep pace with digital transformation means that entering this new era of banking needs to happen quickly and efficiently.
Consider Open Banking for What It Is
It remains imperative that banks think about open banking for what it is: an opportunity to continue enhancing and building relationships with their customers. By treating open banking as a way to give consumers what they want and need from their financial institutions, banks are limiting the likelihood that those consumers will seek alternative banking services outside their current banking agent.
Beyond better customer relationships, open banking also offers financial institutions the ability to improve their digital infrastructure. With a push across industries for increased automation and efficiency, now is the perfect time for banks and the fintech world to work together. Third-party collaboration allows for more expansive service offerings, which in turn can drive more business to all parties involved, and a better customer experience. This is truly a win-win-win scenario.
The Keys to Successful Open Banking
Now comes the tricky part. Without national regulation to drive the adoption of open banking, it is up to banks to start their open banking journey. For starters, banks can consider embedded banking services, which give non-financial providers the ability to provide financial services through an app or platform via APIs.
Speaking of apps, another popular shift within open banking includes applications that can analyze user data for recommendations on things such as budgeting, debt repayment, etc. This is another opportunity for financial institutions to build relationships with users if they can streamline their information being accessible to those third-party apps. These arrangements have already become popular as consumers looked for ways to keep track of their finances through services their banks were not able to offer at the time. Now that those apps are available far and wide, many banks have adopted the tools to allow this integration seamlessly.
Lastly, banks have the option to work within a marketplace. This would allow banks to connect with other financial institutions to collaborate and offer connected services to consumers. By being able to pick and choose what services they provide, this option allows more small and mid-size banks to retain customer relationships.
To truly understand and better prepare for open banking in 2022, the first step is for banks to start thinking about what they offer now versus what they want to offer this year. Establishing a road map to open banking starts with the decision to implement the above strategies or even others that they have considered internally. From there, testing those methods and capabilities is key before rolling it out to customers to avoid burning any bridges with faulty product offerings. Finally, feedback is key. Listening to consumer feedback and being able to fix and pivot as needed will be crucial to walking the line with open banking.
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