3 Ways to Improve Customer Experiences with Open Banking

Picture a world where you can offer instant transfers between accounts, give customers a comprehensive view of their finances, and assess creditworthiness in seconds. Sound like fiction? Open banking, coupled with instant payments, can make it a reality.

Banks can easily connect third-party entities with open banking, thanks to standardized APIs. This infrastructure can enable all of the things I've mentioned above – and much, much more.

Here, I'll explain how open banking can transform the customer experience. But first, a look at why open banking is a must for banks.

Background: Why Open Banking Matters

Many banks hear "open banking" and consider new regulations and time-consuming compliance measures. In reality, open banking means embracing a set of standardized APIs that make connections among organizations more manageable. And it holds enormous promise for banks and customers.

In a world of open banking, banks can safely and quickly transfer customer data to a third-party account aggregator or payment platform, for example. They can also receive data from those platforms, like customers' top spending categories across accounts. 

This data can inform how banks personalize financial products and engage with customers. And with common data-sharing standards, banks can give customers more choice over the third-party services they can connect to – a top priority for 76 percent of Americans.

The impact could be as significant as the shift from brick-and-mortar branches to mobile banking apps. And it will open the floodgates for fintech advances that will transform the customer experience in ways we can't imagine. Translation: happier customers and more opportunities for revenue generation.

In the following sections, we'll examine how open banking technology impacts the customer experience.

Use Case #1: Secure Account Aggregation

Most Americans have accounts with at least three financial institutions. And if they run a business, they likely use many third-party services to manage their finances, from handling invoices to paying employees. Whether their needs are personal or business, bank customers must have a single view of their finances. 

Most banks have relied on third parties to enable that single view. But account aggregation service providers have historically used screen scraping, which can expose customers' login credentials. Data-sharing networks, such as Plaid and MX, are now more secure and eliminate screen scraping. But they tether the bank to the network's terms of service and capabilities. 

Open banking regulations can solve these problems by requiring all banks to share data via standard APIs, rather than relying exclusively on scattered partnerships. Standardized APIs are far more secure than screen scraping. And they make it possible to focus on building fantastic technology rather than spending time on proprietary integration.

So a bank may present an account aggregation panel in its mobile banking app. At the same time, the bank enables customers to link their accounts to third-party apps that offer similar functionality. And for commercial customers, the bank may provide a branded widget in a commercial customer's payroll service that displays all available funds.

In this use case, open banking benefits more than just customers. A bank can access a bigger pool of financial data from a customer's financial institutions. That means they can offer wealth management services to customers with multiple investment accounts or more accurately tailor credit card offers to a customer's spending habits.

The bottom line: by embracing open banking, banks can offer a more personalized experience to every customer.

Use Case #2: Real-Time Payments and Transfers

There's a good chance you've used PayPal to buy a new couch or transferred your Venmo balance to your checking account. These mobile payment services are convenient for sending and receiving cash, but funds settlement is not real-time.

For bank customers, payment settlement delays are inconvenient at best. At worst, they can mean a missed loan payment due to insufficient funds in the account.

Open banking, coupled with the new instant payment rails, offers a solution. Banks and other financial services providers can connect to provide real-time payments, and funds transfers thanks to open banking's API-first infrastructure. 

For example, open banking has enabled banks outside the U.S. to offer "pay-by-bank" instant payment solutions. In an e-commerce transaction, for instance, the buyer would connect to their bank account to authorize the purchase, resulting in instant funds availability for the seller. The seller could offer a discount to the buyer as an incentive to use instant pay-by-bank, and it would likely be cheaper than a card or digital wallet (i.e., PayPal) transaction. 

Pay-by-bank allows banks to capture revenue from customers that don't use credit cards. And with the right incentives, sellers can attract those customers too. Here, the benefits of open banking are clear. With a frictionless payment and transfer experience – plus better back-end services for banks – it's easier to satisfy customers and boost revenue. 

Use Case #3: Credit Assessment via Alternative Financial Data

In the United States, a staggering 49 million adults are considered credit invisible or unscorable: they lack the financial data they need to establish a credit score. Many of these people are low-income or from underserved communities, which has a high impact on their ability to build credit. Others are recent immigrants who are effectively financial blank slates, even if they have a solid financial record in their home countries.

Renting an apartment, applying for a mortgage, or qualifying for a loan is challenging without a credit score. But there's another way to prove creditworthiness. With open banking technology, customers can authorize third-party providers to access their historical banking behavioral data, which can help prove financial reliability. For example, accessing a customer's checking account could prove they've never overdrawn and demonstrate a stable income history. 

Imagine a mortgage applicant who recently immigrated to the United States from Brazil (as one of this article’s authors did many years ago now!). With third-party APIs, your bank could pull financial data from their Brazilian bank (utility payments, phone bills, etc.) and feed it into a proprietary credit scoring algorithm (or a third-party app). In seconds, loan officers could view an alternative credit score – and determine whether the applicant qualifies. 

In the long run, open banking empowers anyone – banks included – to build software that more accurately assesses credit risk for a larger population. That gives banks a chance to reach traditionally underserved communities with helpful financial products. That's a plus for society and the bottom line.

The Future of Banking is Open

In the US, the conversation around open banking still hinges on regulations. But open banking will allow banks to improve the customer experience in transformative ways – just like the shift to mobile banking sparked by the introduction of the iPhone about fifteen years ago.

The movement has begun in Brazil, Australia, the United Kingdom, and many other countries. In the next decade, it will also become standard in the US. 

The decision for banks is clear: invest in open banking technology now or play catch-up in the years to come.

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