The world of finance is rapidly changing. New players challenge legacy banks, financial technology is quickly developing, and new payment solutions appear on the market. A large portion of these changes has been brought to the industry by open banking.
Open banking has been changing the industry by opening up the data and offering services that were only provided by individual banks. The goal of data sharing and services is to bring innovations to the financial landscape, focus on consumer needs, and ensure maximum security while achieving those goals.
Going deeper into the definition of open banking, it describes the practice of banks sharing data with licenced third-party service providers. The data is shared via secure application programming interfaces (APIs). The shared information includes account information, transactions, and other financial data. Open banking also covers payment initiation services, which enable third-party providers to offer an improved and convenient payment flow.
The new era for the financial industry started with the introduction of open banking. It has challenged the old systems and brought a number of benefits for various parties involved: businesses, consumers, and financial institutions.
Open banking benefits for businesses
Businesses can highly benefit from open banking by utilising various payment service providers. Here are the main benefits for businesses:
1. Lower fees
Open banking enables businesses to pay less for transactions. For example, account-to-account (A2A) payments can reduce transaction costs by eliminating card schemes. Card providers charge various fees for accepting card payments, which inflates the transaction costs.
Companies can also save by choosing a payment gateway with the most cost-effective service. Open banking has helped more payment service providers join the market and offer services at competitive rates.
2. Higher conversion rates
Improved customer experience can also boost conversion rates. Choosing a payment gateway with a convenient checkout flow and multiple payment methods can benefit businesses by increasing their conversions.
For example, a sporting goods retailer, Decathlon, has integrated kevin. payment gateway, and this way reduced abandoned cart rates by 50%.
3. Higher acceptance rates
E-commerce businesses and other companies can now accept payments from consumers anywhere in Europe. This can significantly boost companies’ payment acceptance rates. For example, kevin. payment initiation service clients can serve over 350M consumers around Europe. This benefit helps companies scale their businesses and enter new markets without any hassle.
4. Instant settlement
Open banking enables more opportunities for third-party service providers to expand payment methods. Convenient A2A payments use instant payment rails, which means the funds travel faster. Even with cross-border payments, transfers can be instantly validated, enabling businesses to fulfil their orders quickly.
Businesses can get more data about their consumers, their finances, and habits. Having this information enables companies to offer more personalised services to their customers. For example, companies can find out about their consumers' spending habits and provide them with services to help save money.
Benefits of open banking for consumers
One of the leading open banking goals is to improve financial services for consumers. These are the main benefits that open banking has brought to them:
1. Customer experience
An improved customer experience is a result of two aspects open banking has created: a competitive environment and digital services.
First of all, open banking challenges the traditional ways of banking and has opened the door for more players to enter the market. Creating a competitive environment benefits consumers because, in order to stand out, companies need to ensure their customer service meets the highest standards.
Secondly, open banking has made finance management more straightforward. Thanks to the open banking regulations, legacy banks have improved their online services, which has resulted in an improved customer experience. Open banking is moving financial services from in-person to online, which results in quicker and easier finance management for consumers.
Security is at the core of open banking. Now all the third-party payment service providers must meet the highest security standards to operate in the market. Open banking has also brought more transparency to the banking industry since more players share data, and security features are more widely standardised.
Consumer identity authentication has also been improved. For example, open banking and PSD2 in Europe have implemented Strong Customer Authentication (SCA), which adds an extra security layer to all electronic payments and reduces the risk of payment fraud.
3. Reduced service costs
With more competition, banks and other financial service providers are more likely to reduce their service costs to become more appealing to consumers. If consumers don't agree with the service provider’s pricing, they can easily turn to another one and look for the best price.
A standardised system also allows cheaper and faster European transactions.
4. Centralised information
Open banking enables the sharing of information that was previously only kept by banks. This data can now be transferred to licensed service providers with a consumer's consent, making banking operations quicker and more convenient.
Thanks to centralised information, consumers can now get more services in one place. Financial services can meet more customers' needs by providing advice, loan information, and managing bank transfers with more visibility.
5. Innovative solutions
Information sharing has encouraged companies to create more innovative solutions. Fintech companies are creating technological solutions that legacy banks have never offered before.
For example, kevin. has created the first-ever account-to-account payment solution for POS terminals. This technology enables customers to conveniently pay for goods and services in physical stores without a bank card. Consumers can simply pay via their bank accounts.
Open banking benefits for banks and financial institutions
Various companies and consumers aren’t the only ones benefiting from open banking. Traditional banks and financial institutions have also gained advantages:
1. Bank and fintech collaboration
To stay relevant in the fast-changing world of finances, banks and financial institutions can partner with fintech companies. This enables banks to stay ahead of the competition and utilise innovative infrastructures created by fintech companies.
With the help of APIs, open banking also enables data sharing between banks and fintech companies. This helps banks expand their knowledge in the tech field and stay up to date with innovative solutions emerging in the market.
2. New financial technologies
Open banking enabled licensed companies to join the playground, which, for a long time, was limited to legacy banks. These companies bring in new ideas and can create innovative financial solutions that banks rarely had the resources or motivation to invest in.
Fintech companies are quickly joining the market and offering various innovative financial technologies that benefit both consumers and banks that are willing to collaborate.
3. Better customer engagement
With so much competition emerging in the market, banks and financial institutions are forced to step up and improve their offerings. Banks are creating new mobile applications, offering easy investment opportunities, and shifting their services to the online world.
Those companies that succeed in the digital transformation benefit from improved customer engagement and satisfaction.
What are the disadvantages of open banking?
With so many benefits, it’s only fair that open banking also comes with a few drawbacks:
- Banks are getting left behind. Not all banks are capable of keeping up with fintech companies and all the changes in the industry. This means that their clients don’t get to utilise all the advantages of open banking. Consumers then turn to other service providers capable of providing better services.
- Consumer trust is still low. Open banking is still relatively new, and some consumers and companies are slow to adapt to the changes. However, fintech companies and other interested parties are working hard to educate users and help them understand the benefits of open banking.
- Personal interactions are decreasing. With most services moving online, consumers are left with fewer personal interactions with their banks or financial service providers. Banks that had high customer loyalty due to their interpersonal services are now losing their clients.
Open banking challenges the traditional ways of banking. Its goal is to bring innovations to the financial sector and create a customer-centric system while maintaining the highest security standards.
While open banking is still relatively new, it has already benefited businesses, consumers, and financial institutions. Companies can now use more cost-efficient payment services, which can help improve conversion rates and move their money quicker. Consumers are benefiting from improved payment flows, better security, and can enjoy innovative financial solutions. Open banking provides consumers with more control over their finances and gives them more choices. Meanwhile, banks and financial institutions can collaborate with fintech companies and offer clients improved financial technologies.
Open banking has a few drawbacks, too. Some legacy banks struggle to keep up with the latest technologies. User trust in the new system is still relatively low, and personal interactions between financial service providers and consumers are decreasing.
However, the benefits of the new financial system outweigh the disadvantages, and open banking has great potential to improve the financial world. If you’d like to enjoy the benefits of open banking, partner with kevin. and make the most of innovative technological solutions first-hand.