Open banking means big changes for the financial industry – challenges which must be addressed through cooperation and innovation
Disruption, with a change of business models, is imminent with the arrival of open banking. Financial institutions will have to adapt their practices, structures and mentality to develop and launch new products and models.
The improvement of banking services and how they are delivered is the most important aspect of open banking, better understood as the opening of banking information to third parties, where the user is a priority and the collaboration between banking institutions creates a new financial structure.
Latin America is going through a process of regulatory evolution, where some countries have developed an official framework. Over the past couple of years, we have seen open banking gain ground in Mexico, while in Brazil everything is getting ready for its upcoming implementation.
On the other hand, Chile is preparing a law that anticipates the first steps of open banking through financial portability, which involves some, but not all aspects of this model.
“The concept of portability in finance is related to the fact of giving the user the possibility of refinancing their products through another institution. In this sense, banks will continue to handle financial products, but the ‘new experience’ will be provided by technology companies,” explains Greynier Fuentes, VP of Digital Solutions for VeriTran.
Open banking: benefits for all
Both financial portability and open banking aim at the same goal: to increase competition in the banking market to achieve the best service and experience for the end users.
Among the benefits to clients of open banking are solutions for financially underserved sectors through easier and more affordable formats, better refinancing options, better interest rates, or the elimination of checking account fees, according to some sources.
Other benefits for clients will be new integrations between the financial and non-financial worlds, to provide more useful services for all. An example would be a greater integration of e-commerce processes within other services.
In addition, open banking will increase revenues for the financial sector as a whole, McKinsey predicts – and banks are well positioned to take advantage of the new scenario. However, it also implies a revision of the business model.
Developing new business models
The arrival of open banking opens the way for more competition for traditional banks, and therefore demands financial institutions examine new potential business models.
“We are in a ‘Kodak’ moment for banks,” said Omar Arab, Executive Vice President of Corporate Business at VeriTran. “Open Banking means a change in the business model for banks: a change in practices and mindsets.”
Banking as a service and platformification are key business models for traditional institutions in the context of Open Banking.
Under these formats, financial licenses and large amounts of financial data will become critical assets for banks. Banks will charge third parties for the consumption of information through application programming interfaces (APIs).
So, for financial institutions, the most important thing to get right is a strategy for the use of APIs, explains Arab. At the same time, it is in their best interest to partner with major technology companies to successfully address this moment of profound change.
Open banking requires cooperation between institutions for the benefit of the user. Banks will continue to offer their financial services and charge for them, but it is through alliances with tech partners that the business model will change.
“This is the evolution of the financial industry at its best, which means they will have to open up and develop a strategy for collaboration and build an ecosystem with the best experience for consumers to use,” Arab said.