Table of Contents
Introduction
Open banking refers to banks and other financial institutions that open data for third-party service providers to use, access, and share. Third-party service providers get access to the financial data of customers, like statements and transaction records, which generally belong to bank customers. However, this data can only be shared at the request of customers. So, open banking also comes with a strong technological infrastructure and legal framework to make sure the data is not leaked to cybercriminals.
In this article, we will talk about the importance of open banking and the application areas in the banking, financial services, and insurance (BFSI) industry. It would be a continuation of a previous article where we focused on how open banking works in different regions across the globe.
1. Importance of Open Banking
Open banking isn’t just solving major banking problems; it’s also sparking competition and innovation in the financial sector to create better products and service experiences for customers.
According to a global survey, 60% of consumers are interested in open-banking experiences, as they can access their information online and do not have to visit banks or financial institutes for monetary transactions. Not only that, the whole process of monetary transactions can be processed in a few clicks; thus, customers no longer have to wait in long queues.
Open banking has become a global phenomenon as each country is finding out how this data-sharing process would help them. According to a report by the World Bank, SMEs represent 90% of businesses and 50% of employees worldwide; however, post-COVID, these enterprises are pushing for digitalization strategies to work properly. So, SMEs have started implementing several new technologies, like AI automation. Open banking, open finance solutions, and more to streamline proper growth and balance the country’s economy. Some countries have already started enforcing open banking regulations, whereas others have yet to kickstart their journey.
2. Uses of Open Banking in the BFSI Sector
Here are four possible use cases of open banking in the BFSI sector:
2.1. Personal Finance Management
Open Banking has transformed the way customers and businesses manage their financial data from their accounts, like current, savings, investments, loans, insurance, mortgages, pensions, and loyalty. It is a one-stop shop for budgeting advice and personalized recommendations. Open banking fosters automation in business processes like billing, invoices, and accounting by eliminating manual entry of data.
2.2. Investing & Wealth Management
Before advising the right investment based on the customer’s capacity and risk appetite, digital wealth managers may obtain more insight about their client by utilizing Open Banking standards. Additionally, they may transfer funds at lower prices between the customer account and the bank by utilizing the Open Banking rails.
2.3. Bill Payment
Open banking offers billing and payment options for customers and billers. With the help of APIs, billers can send bills directly to customers’ bank accounts to gain their trust and loyalty.
2.4. Buy Now, Pay Later
The BNPL (By Now, Pay Later) method needs a banking system to verify customers’ identities, financial records, and verified documents to make lending decisions. With the help of open banking, customers can give consent to the lenders accessing their data to grant and process loan applications and create approvals.
Conclusion
Ultimately, open banking allows financial institutions, banks, and third-party service providers to offer more streamlined and customized experiences. This method of payment has been widely enacted in many countries, which will empower consumers to take control of their money and aid them in making informed financial decisions.
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