It’s no secret that the banking industry is in the midst of a major upheaval. One of the most promising new developments in this space is open banking. Simply put, open banking allows customers to share their data with third-party providers in a secure and transparent way.
So far, open banking has been a massive success in Europe, where it has led to increased competition and innovation among banks. But can it thrive in North America? In this article, I explore the potential direction open banking is heading in. I’ll also look at how one industry leader is preparing for its arrival.
How Does Open Banking Work?
Open banking is built on the idea of customer-centricity. Under this model, customers are in control of their own data, and they can choose to share it with third-party providers (TPPs) of their choice. This sharing is done through APIs, or Application Programming Interfaces. APIs are standardized protocols that allow different systems to communicate with each other.
Open banking APIs give TPPs access to a customer’s financial data. FinTech companies can then use this data to provide a variety of services. From budgeting tools to personalized lending products, it’s all made possible through APIs. This increased competition is good for customers, who now have more choices than ever before.
There’s no doubt that open banking has the potential to transform the North American banking industry. As of 2022, both the USA and Canada have taken the first steps toward implementing open banking frameworks.
In the USA, the CFPB is taking baby steps by opening the “Office of Competition and Innovation” to study the best way to bring open banking to the country. While this may seem like a small step, it’s a big deal for a regulatory agency that has been historically resistant to change of this type.
Meanwhile, the Canadian federal government has recently completed a three-year consultation process. Overseen by the “Advisory Committee on Open Banking,” the Canadian framework is one of the most comprehensive in the world. The Final Report announced January 2023 as the official date of launch for open banking.
As for KYC and AML, both countries have well-established regulations in place. These will need to be taken into account when implementing open banking. Note that they are one of the main reasons why open banking has been slow to take off, especially with the U.S’s private banking model.
With around 10,000 financial institutions in the USA, it may not be feasible for all of them to develop their own APIs.
While open banking legislation is important, technology is the real key to its success. Banks must invest in robust API infrastructure to provide a seamless experience for customers and TPPs. Other technologies we can expect to see flourish in the world of open banking include:
Open banking will require more robust authentication methods to protect customer data. Many banks are already using biometrics like fingerprint scanning and facial recognition. We can expect to see more widespread adoption in the coming years.
Artificial intelligence: AI will play a big role in open banking, from helping customers choose the right TPPs to providing personalized financial advice. Predictive analytics, which use historical data to make predictions about the future, will also be used. In this case, it will be to detect fraud and prevent money laundering.
Cloud computing: The increased demand for data storage and processing power will lead to more widespread adoption of cloud computing in the banking sector. Cloud-based solutions are more scalable and cost-effective than traditional on-premise servers, making them a perfect fit for open banking.
Robotics Process Automation (RPA): RPA can automate repetitive tasks like data entry and customer service freeing up employees to focus on more critical tasks. It will be crucial for banks as they try to keep up with the increased demand for services that open banking will bring.
Digital banking: Open banking will require many banks to shift to digital banking. This means more mobile apps, online banking, and in-app payments. We’ve already seen a trend toward digital banking in recent years, and this will only accelerate as open banking becomes more popular.
Entities like neobanks and challenger banks are also likely to gain ground in the open banking era.
Open banking is coming to North America, and there’s no turning back. This new model is merging with the banking industry, and we’re already seeing the first steps being taken by legislatures and technology providers. The next few years will be crucial for open banking in North America, and we can’t wait to see what the future holds.
Image and article originally from fintechreview.net. Read the original article here.