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Frederrick Hamann

The 5 best use cases of open banking

Open banking is revolutionizing the use cases offered by banks and financial institutions. Here are five of the most popular ones.

Open banking for banks and financial institutions have wide and varied benefits. It creates a larger and more diverse digital offering for them and allows them to develop a range of different products – faster. Investing in various aspects of open banking can have a huge upside. In fact, many banks have already key areas of use that are worth paying attention to, such as how to digitise customer experience. But before we dive into the most popular use cases, let’s answer a couple of questions:

What is Open Banking?

Open banking allows banks and other financially regulated institutions to more easily access the financial data of customers. The exchange of data is facilitated through APIs or Application Programming Interfaces. This is a set of computer programmes which make it easier for various banks and financial services to communicate with each other. 

The goal is to improve current and develop new features, which can drive down costs or generate revenue. All of which can be closely linked to different financial products. 

How is it helping customers?

It essentially provides customers with greater access to a range of financial services from a larger number of providers. This led to the rise of numerous fintechs, while the established financial industry is also providing new open banking use cases.

This greatly benefits customers. For instance, it can allow them to bring all their accounts and products into one interface, giving them an overview of their finances and allowing providers to work out which products are best suited to them.

How open banking goes further than PSD2

PSD2 is a European regulation that came into force in January 2018. Its purpose was to increase security in electronic payments and competition across Europe. To do this, it encouraged the use of APIs. Today, these APIs can be used by established financial players, but also new fintechs and tech companies like Apple and Google. 

PSD2 can thus be seen as the regulatory starting point, while open banking goes further. While PSD2 focuses solely on payment accounts in a well-defined regulatory framework, open banking can include investment accounts, business accounts and APIs not in PSD2. In essence open banking is broader. What defines it is digital strategy, access to data and functionalities that a bank or financial institution is giving.

Here are five examples of the most popular open banking use cases:

  • Account aggregation

This is probably the most popular one. Account aggregation is already offered by a number of financial services companies. It involves using an API to allow customers to get an overview of their various accounts.

Account aggregation means customers can see multiple accounts from different providers on one interface. It’s not just straightforward payment accounts either, which the PSD2 framework gives access to. There are examples of where you can view credit cards, investment accounts and loan accounts in one place, as well as combining consumer and business banking in the same interface.

Examples: Plaid, Tink, Nordic API Gateway

  • Personal finance management

There has been a big increase in personal finance management (PFM) tools in the latter years. These tools are meant to give the customers a complete overview of their financial situation. For example, this can be placing payments in different categories or showing how much money the customer has left to spend this month. Dedicated software allows PFMs to pull in information from various accounts into one informative interface.

Having data centralised can help banks and financial providers get a clear idea of what customers would benefit from and it also gives a customer a clear picture of how their money is performing for them. It creates financial insights.

Of course, financial management and wealth management pre-date its arrival, but open banking has unlocked some of the possibilities within a PFM. Both when a bank is connecting its own APIs across different business units, but also in connecting to API’s at other banks. Open banking has contributed to a greater proliferation of financial management services. Thus offering choice to the customer and opportunities for providers to offer a range of tailored products.

Examples: Spiir, Yolt, Mint

  • Instant credit risk

Open banking can rapidly speed-up credit applications by allowing lenders to gain an almost instantaneous overview of an applicant’s credit history. Prior to that, assessing applicants for credit often involved pulling together different documents from different banks and institutions. This  process not only slowed down the delivery of credit services but led to a negative customer experience.

Gaining access to a raft of instant banking data can allow lenders and underwriters to make quicker decisions. 

It can also allow the consumer to quickly find the products for which they are most likely to be approved. Instant credit risk means they can use comparison sites for loans and credit cards and receive an indication of their likelihood of acceptance before applying. This tendency contributed to the rise in a lot of the Buy Now Pay Later functionalities within the financial industry.

Examples: Klarna, Afterpay, Zip Pay

  • Subscription management

While account aggregation and PFM services are already well-known, subscription management is fairly new. This feature gives both insights and actions. Subscription management basically detects all the recurring payments from the customer and shows them in one interface.  This can be anything from a streaming service or a fitness membership to a utility bill or a monthly mortgage. From here the customer can manage the recurring payments by for instance cancelling unwanted subscriptions or getting notified about upcoming payments.

Gaining insights into various transactions can allow open banking to be used effectively for subscription management. Especially if one single interface can aggregate recurring payments from different accounts in different banks. The benefits for the bank or the financial institution can be lower customer support costs on recurring payments, better churn rates on current customers and the possibility to cross-sell financial products. Find out how Subaio’s subscription management system works here

Examples: SubaioApTap

  • Opening new accounts

Opening a new account with a bank is now much easier and faster. This is highly linked to the Know Your Customer (KYC) process. Often banks want to get as much information as possible about a customer before authorising a new account opening. This is obviously for security reasons, but also to limit the risks of fraud. Moreover, this onboarding process also can help in profiling the new customer.

Open banking allows the flow of bank data so that information such as an address, occupation, income details, name and date of birth as well as credit history all match up. Because this can be done in a matter of minutes, the experience of opening a new account is much smoother for customers – and suddenly this can also turn into a competitive necessity. Opening a new account digitally is the customer’s first interaction with the bank online, so expectations on speed and user experience will be high for some customer segments.

Examples: IDnow, Onfido, Authent

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