Digital Transformation is a development we see across all industries. The banking sector has increasingly been challenged by emerging FinTech companies, who attract the incumbent’s customers by offering easy-to-use and frictionless experience in their personal banking.
The crucial difference between traditional financial institutions and FinTechs is their different approach to customer experience: the latter focusses on the customer and their needs whereas the first is still often caught in their rigid processes from the 20th century. Open banking is a fairly new phenomenon that allows collaboration between FinTechs and traditional firms. Both parties can thus overcome their obstacles and tackle the future as a joint force.
What is Open Banking and how does it work?
But what exactly does open banking mean? Open banking makes use of open source technology and sets up a structure for software to interact. It permits 3rd parties to develop new products and services. Via APIs and only with the authorization from the customer data can be shared between different members of the banking ecosystem. But open banking via APIs does not automatically equate unlimited data exchange without control. Three versions of API clearly define the extent to which data can flow between the traditional firms and third parties:
Therefore, by choosing the most relevant version, financial institutions no longer have an excuse to remain reluctant towards collaboration with FinTechs. Privacy and security will remain a high priority within set boundaries. Via APIs, both traditional firms and FinTechs can acknowledge and complement each other’s competencies.
Why should banks collaborate with FinTechs anyway?
By understanding that they can leverage their strengths that way, they can develop customer-centrist solutions. The power of customer insight from traditional banking organizations and FinTech innovation by Startups pave the way for rethinking the banking systems and customer interaction of the 21st century. Five obvious benefits can be detected in favor of intensive open banking activities:
The future has never been closer
Traditional firms and FinTech Startups getting closer could also mean new forms of collaboration across industries. Experts observe a merge of different financial and non-financial firms into one mobile marketplace banking which is enabled through the interconnection of APIs. The future ecosystem of all providers is data-driven and platform-based with the common goal to offer the customer personalized and valuable products. This development has never put the customer in the spotlight to such an extent that the clear distinction between industries will progressively blur. For example, purchasing a car or a piece of real estate or starting a business which usually involves different partners such as insurance providers, the government or banks could instead take place in one centralized marketplace. The first steps towards such a holistic process are joining forces and increasing collaborative projects. From a technological perspective, it means enabling APIs for third parties and embracing new services and products (FinTech companies) while providing the needed infrastructure (incumbents).