The dual impact of open banking: streamlining payments & enhancing cx

The financial services and banking sector is undergoing a seismic shift with the increasing adoption of open banking. This transformative concept hinges on the capability of third-party developers to build intelligent applications and secure financial services, driving market competition and improving the customer experience journey.

The rise of open banking

Open banking emerged as a direct response to the growing demand for enhanced customer control over financial data, transparency, and the need for innovative financial services. The European Union’s PSD2 (Payment Services Directive 2), implemented in 2018, marked a significant milestone by mandating banks to open their payment services and customer data to third-party providers. The USA and UAE have followed suit, recognizing the potential of open banking to drive financial inclusion, competition, and innovation.

What is open banking?

Open banking fundamentally reimagines traditional banking by granting third-party financial service providers access to bank data through APIs (Application Programming Interfaces). This democratization of financial data empowers consumers to share their financial information securely with authorized third parties. Open banking catalyzes a collaborative ecosystem where customer-centric solutions thrive by breaking down the barriers between banks and fintech companies.

The global open banking market share is projected to hit $43.15 billion by 2026, growing at a CAGR of 24.4% annually. This seismic shift not only promises increased operational efficiencies but also unlocks fresh opportunities for customer engagement and retention through hyper-personalized financial solutions.

A banking major reduced user churn using Clootrack’s AI-powered engine: Find out how

‍

Market dynamics and strategic imperatives

In the USA, where the adoption of pro-open banking frameworks such as Personal Financial Data Rights is gaining momentum, financial institutions are embracing data-driven strategies to differentiate their offerings and capture market share. Similarly, in the UAE, regulatory initiatives like the UAE Open Banking Framework are paving the way for enhanced collaboration between banks and fintech players, driving innovation and customer-centricity in the region's burgeoning fintech ecosystem.

Moreover, banks that have utilized open banking APIs have experienced a 20% rise in revenue, highlighting the extensive advantages of this financial innovation across different industries. This strategic imperative underscores the transformative potential of open banking in reshaping business models, enhancing operational efficiencies, and fostering sustainable growth in an increasingly digital-first economy.

Impact on Fintech: A paradigm shift

Source

1. Increased competition ∝ innovation

Open banking democratizes the financial services industry by leveling the playing field for fintech startups.

Traditional banks, once the sole custodians of financial data, now face competition from agile fintech firms offering innovative solutions. This competition drives financial institutions to innovate, resulting in better services for customers.

2. Streamlined payment processes

Open banking facilitates seamless and secure payment processes by enabling direct transfers between bank accounts through APIs (Application Programming Interfaces). This reduces reliance on traditional payment methods, cuts transaction costs, and speeds up payment processing times.

A BCG report highlights that the global payments industry will grow to $2.2 trillion by 2024, driven by advancements in open banking and fintech innovations. The United States is at the forefront of this growth, with numerous fintech firms developing cutting-edge payment solutions.

3. 2x customer experience

Fintech companies are leveraging open banking to offer personalized financial services that cater to individual customer needs. By accessing real-time data, fintech firms can provide tailored financial advice, budgeting tools, and alternative investment recommendations. This level of personalization enhances customer satisfaction and loyalty, as more than 70% of consumers currently expect a personalized experience.

The role of cx data insights in driving open banking forward

CX data insights are the bedrock for the open banking model, offering financial institutions and fintech firms clear visibility into consumer behaviors, preferences, and pain points. By harnessing advanced analytics and AI-powered technologies, you can derive actionable insights from vast pools of transactional data. This, in turn, enables you to anticipate customer needs, personalize offerings, and optimize the overall customer journey.

According to a market research report, 72% of consumers believe personalized financial services are “highly important.” This sentiment underscores the pivotal role of CX data in enhancing customer satisfaction and loyalty in an increasingly competitive market landscape.

Here’s how CX data insights are driving the open banking trend:

Power of “personalization”

Personalized financial services can increase customer satisfaction by up to 20% (Mckinsey)

Financial institutions are utilizing advanced data analytics to gain insights into customer preferences and behaviors. Banks can create personalized financial products and services by analyzing transaction data, spending patterns, and social interactions. For instance, a frequent travel customer may receive tailored travel insurance offers, while a young professional might get personalized investment advice.

Customers are willing to recognize and appreciate banks that provide contextually relevant and valuable personalized experiences. Banks that excel in implementing key personalization strategies based on cx data analytics enjoy both short-term and long-term business results and advantages over those lacking personalization capabilities.

A market study found that 58% of surveyed customers find it frustrating when their bank asks for personal information they already have during a new product application. Additionally, 54% hold accounts with multiple financial institutions, making it easy for these frustrated customers to switch to competing banks that streamline the process.

Pro-active risk mitigation and management

Open banking introduces new risks, including data breaches and cyber threats. However, CX data insights can help mitigate these risks by comprehensively understanding customer behavior and identifying anomalies. By leveraging data analytics, financial institutions can detect fraudulent activities in real time and implement robust security measures in the following ways:

Anomaly or red flag identification
High-risk area identification
Validating the accuracy of the risk assessment findings
Highlighting the need for additional security measures
Monitoring high-risk behaviors, patterns, and schemes
Measuring the effectiveness of the risk management action plans
Providing proactive alerts.

Predictive analytics and decision-making: The dream duo

Predictive analytics uses AI and ML (machine learning) to enable financial institutions to anticipate customer needs and offer proactive solutions. Banks can predict customer requirements by analyzing historical data and identifying trends, such as loan eligibility or investment opportunities. This proactive approach enhances customer satisfaction and doubles business growth.

By embedding predictive analytics into decision-support systems, financial institutions can automate certain decisions, such as credit approvals or investment allocations, leading to faster, more consistent, and more scalable decision-making.

While predictive analytics provides invaluable insights, the true power lies in translating these data insights into strategic decisions.

Request demo now!

Conclusion

“Open Banking is about making everything for sale. It provides a new way to increase digital revenue for the banks that are willing to think differently about what it means to be a bank.” - Kristin Moyer, VP Research, Gartner

Open banking is redefining the financial services sector by empowering consumers and streamlining customer experiences. By granting consumers unprecedented control over their financial data, open banking enhances trust and aligns with stringent data protection regulations like GDPR.

It also disrupts traditional financial monopolies, fostering a competitive environment ripe with innovation. This disruption encourages financial institutions to innovate continuously, offering customers more personalized and cost-effective solutions.