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Open Banking: The Business Model of the Future

Traditionally, financial institutions may function as business-to-Consumer (B2C) organizations, which directly serve and have relationships with individuals, or as Business-to-Business (B2B) banks, which provide services to business and possibly other financial institutions.

However now, thanks to the European Union’s Payment Services Directive (PSD2) and open banking application programming interfaces (APIs), a new business model exists. Because of the need to open up connections and visibility into customer accounts it is possible for third party service providers – other companies – to implement applications and services on top of existing banking systems.  Therefore, banks now need to cater to both B2C and B2B audiences, whether they want to or not. Third-party providers (TPPs) that harness these new APIs can enhance their services and deliver added customer value by providing more robust services augmented with financial data that can be obtained with fewer agreements.

Open banking provides opportunities for innovation and collaboration between the financial sector, vendors and service providers who want to offer seamless payment options and improved customer experience. Open banking APIs are making it possible for third-party service providers to interface directly with the engines of the financial industry, and to provide new types of services and interfaces that allow for increase customer engagement and utility. The intent of the development of the open banking concept was for customers to decide who should have access to their banking data and what these entities are allowed to do with this data.

Open Banking APIs are already affecting the way we bank by:

  • Putting pressure on banks to offer more of what consumers demand
  • Providing helpful tools for streamlined consumer and business lending
  • Including automated accounting in your portfolio
  • Fighting fraud and waste
  • Setting up new ways to pay and accept payments
  • Building innovative services

Mandated by regulation, demanded by consumers

What started with European Union regulations around the standardization of banking APIs, the open banking model is now being propelled forward by shifting consumer loyalties. Banks that used to be first choice due to longstanding relationships or favorable interest rates are finding that today’s customers are more interested in mobile accessibility, ease of transactional user experience and information security. These consumer preference shifts occur naturally, for example, generationally. A young person opening a bank account now will have different requirements compared to their parents when they opened their first bank account.

Open banking APIs provide a smoother process for food delivery services, ride-sharing companies and the other providers that consumers have come to increasingly rely on to interface directly with a consumer’s financial institution. More than that, they have also provided the financial industry the opportunity to offer consumers seamless account aggregation, loan approval, and insurance options as well.

These APIs are doing more than interface; they are providing smoother customer experiences and more functionality so that consumers can choose from a wider range of services enabled by the seamless integration Open Banking APIs offer. Banks must not only open their APIs, but also be willing to strategize around new services offerings, develop new and more innovative online and mobile services, and embrace the collaboration with these third parties. This is the crucial concept that banks need to understand. APIs have made this possible, but they must transform their business practices and adjust to the new market conditions.

APIs behind it all

Banks need to concentrate on boosting customer engagement, identifying and harnessing new revenue streams, expanding customer reach and innovating in the financial sector in ways they may not have considered before. To do so, they must:

  • Transform backend systems
  • Develop and provide secure access to the APIs third-party vendors need
  • Develop secure mobile and web applications that consumers are demanding

UL can help which this transformation of backend systems, develop and qualify secure access to the APIs third-party vendors need, as well as assist in the design and validation of secure mobile and web applications that consumers are demanding. In addition, UL can help:

  • Understand the risks and the advantages of Open Banking
  • Prepare your API and monetization strategy
  • Understand how you can make the most out of open banking
  • Expand your reach by implementing open APIs that enable you connect with solutions such as the Internet of Things, automotive, and more
  • Connect with other organizations in one of our Trustathons
  • Draft rules of consent management and user privacy rules
  • Prepare your backend systems to be ready for open APIs

Consumers are leading the transition to open banking, demanding more control over the management of their finances. Every time a financial technology organization offers services like loan and insurance requests or account aggregation operating different accounts from different banking from a single app, they are taking another step into the open banking future.

Providing information security in the age of information sharing

Open banking provides consumers with easy access to services tied to their private financial data. One of the most critical aspects of becoming a part of the open banking revolution is building trust with consumers around the security of their financial information.

UL can help you strategize and develop foundational backend system upgrades and interfaces that not only provide the security consumers demand but also are compliant with local and global regulations, such as the Strong Customer Authentication (SCA) requirements of PSD2. We have been leaders in providing information security services to the financial services sector for decades.

User experience is key

Consumers have more choices today than ever before, and banking is no exception. While you may have been able to attract customers in the past with favorable interest rates and premium gifts for opening accounts, today’s consumers are looking for payment security, easy online and mobile transactions, and seamless integration with the vendors they trust.

Not only can we help you develop the backend systems needed to support these transactions but also build user experience best practices into your consumer-facing applications.  UL has business areas specifically devoted to human factors engineering, understanding what makes a UI easy to navigate, as well as understanding what simple things can make solutions less secure.

How we can help

Our industry experts and worldwide resources can help you strategize how you can benefit from the open banking phenomenon and lead the pack, rather than being left behind by it. We can help you during the entire transition from conception to design and from implementation to operations.

Contact us today to start transforming the way you do business.