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Open banking benefits for customers, businesses, and banks

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Last editedSep 202310 min read

Market competition, innovation and more compelling services for end users are an integral part of open banking foundations. In contrast, traditional banking used to impose stark offerings on consumers only a few years ago. Although customers seem at the centre stage of this financial data revolution, there are plentiful growth opportunities for every party involved.

Open banking has paved the way for better financial products and services, tailored to the specific needs of customers who now have access to more efficient ways of potentially changing their lives – business loans, mortgages, home loans.

In open banking, opportunities come from the large amounts of data owned by financial institutions, most of it stored instead of being used to drive innovation. Traditional banks have always been very conservative, since they benefited from the fact that they had exclusive access to their customers' financial data.

Modern regulations changed this, by pushing for the sharing of this precious information in order to promote the development of better products and services. These offerings were designed to help end users instead of acting like an additional obstacle to their real life needs.

One thing to always keep in mind is the fact that customers always have to consent to this data sharing. This is an indispensable requirement to access that works as a first security layer, paramount to the success of those operations.

Open banking? What is that?

Perhaps now is a good time to revisit the concept of open banking. It refers to the process of sharing customer financial data through a secure network, composed of several financial institutions. This can only be executed with the customers’ express consent.

In short, this allows regulated third-party providers to gather information to create superior products and services that rely on better insights to enable an improved experience for all parties involved. 

This is why many commentators got their predictions wrong about open banking being the end of legacy banks. Open banking was not designed to end traditional banking, but instead as a powerful ally to help legacy institutions modernise and catch up with an ever-changing financial market.

Businesses like GoCardless can use open banking technology to offer innovative new solutions to customers, making it easier to deal with processes such as invoicing, payments and helping to maintain cash flow

The risks of open banking

All of this does not imply that there are no risks to open banking. After all, the best opportunities come from overcoming challenges. Regulated open banking markets may face some difficulties, as some requirements can make it hard for the market to grow and change. 

It may brake a lot of effort for companies to come up with new and better products and services while following rules like PSD2. But, companies that don't follow these rules may not be able to compete and could lose customers to businesses that do follow the rules and offer more transparency.

But with opportunities come benefits, and there is no shortage of those in open banking for financial institutions, businesses, and customers alike.

Open banking benefits for consumers

In this section:

  • Open banking enables customers to share their financial data with third party providers, to access a wider range of products and services

  • Helps customers save money on loans and mortgages

  • Improves financial inclusion by providing access to financial services to underserved populations

  • Helps prevent financial fraud by giving customers more control over their data and who can access it

Open banking is growing at a very fast pace, particularly in Europe, where the concept was born.

It’s always wise to ask two important questions when analysing its impact:

  • Will consumers embrace open banking?

  • How will they benefit from it?

These questions have already been answered in many ways. Consumers are already embracing open banking, and reaping the benefits of this technology that is keeping financial products and services up-to-date with today’s financial needs. 

In recent years, people have understood that by sharing their bank account data, they are enabling third-party providers to use that information to help them create tailored products and services that remove old barriers and make everyone's lives easier.

Below, you’ll find some important benefits of open banking for the everyday user. These showcase what is already available to consumers, as well as some of the possibilities for the future.

Control over your financial data

Open banking legislation was created with the aim of giving customers an absolute control over their financial information. 

For example, the use of modern APIs makes sure that your login details and passwords are only accessible to you

Even better, the customer has absolute control about who can access their banking data, and is able to decide the level of access. This makes sure that only relevant information is at the third party’s disposal. 

Since open banking also promotes new ways of paying for products and services, companies are unable to take payments without the customer’s say-so

Smarter personal finance management

Through account aggregation, open banking is capable of displaying data from multiple bank accounts in one streamlined view or application

We live in a time when it’s common for people to have more than one bank account, which can make it hard to have full visibility into each of them. 

This is not ideal, as it may impede a true understanding of one’s financial health, leading to unforeseen expenses, loan rejections, and even unexpected maintenance fees.

The data collected from this unified view can be used by third-parties, with explicit customer permission, to recommend better financial products and practices. This includes recommendations about better credit card options, or even loans that are adjusted to your earnings and expenses that can really help you achieve your goals. 

Relevant financial data can be used to provide customers’ with tips on how to save money, without disrupting your daily habits. You can even access recommendations about where to place those savings, if your goal is maximising returns — be it through investments or interest. 

Tailored financial products and services

Today's world is considerably different from the one our parents grew up in. People have different needs, so one-size-fits-all financial solutions can prove far from ideal.

By tapping into multiple accurate data sources, open banking can help companies better understand their customers and come up with products and services designed to meet particular needs.

Open banking technology is capable of providing more options for customers to choose from, optimising the customer's experience and overall results.

Instant online payments

Open banking also revolutionised the way we pay for products and services online. This was particularly important during the COVID-19 pandemic, but it’s something that is here to stay. 

If account information promotes access to banking data in order to help us regain control of our financial lives, payment initiation allows for safer and more convenient ways of completing our online purchases. 

Customers are used to paying with credit or debit cards, but we’ve all come to realise that these are only convenient, until they’re not. Mistakes with this kind of payment methods can lead to considerable headaches. Also forgotten, lost, expired and stolen cards are definitely not convenient!

Open banking payments can be compared to instant bank transfers, with a much lower failure rate and the possibility of instant settlement. As if this wasn’t enough, the adoption of open banking payments can also mean the end of preposterous fees

Since OB transactions are completed almost in real-time and obey high security standards, there is a lot less room for anxiety as we are sure that our money went to the right place. 

Payments have to go through Strong Customer Authentication (SCA) protocols, which helps reduce fraud by adding an important extra step to the authentication process: usually this involves a redirect to one’s bank application, and the user only has to confirm the transaction — no credential sharing of any sort!

GoCardless’s Instant Bank Pay feature allows customers to make payments directly from their bank account. Payments made using Instant Bank Pay are processed in real-time, and the funds are made available to the merchant immediately.

This simple and convenient feature means better visibility for you and your customers, less time chasing one-off payments and a smoother customer experience. Find out how GoCardless can help you with one-off or recurring payments.

Open banking benefits for businesses

In this section:

  • Open banking enables businesses to access their customers’ financial data (with their consent), allowing them to offer better and more personalised products and services

  • Allows businesses to automate and streamline their financial processes, such as accounting and compliance

  • Helps businesses tap into new sources of financing, increasing their revenue

  • Helps businesses to detect and prevent fraud, improving the customer experience

We have discussed the impacts and benefits of open banking for consumers, but what does this new technology really mean for businesses?

Every business can take advantage of open banking, but it’s safe to say that small and medium-size enterprises (SMEs) are the ones that can leverage it to gain the biggest benefits. 

Main benefits of open banking for businesses

Open banking can help small businesses by providing access to financial services and data that they may not have had access to previously. This can include things like payment processing, financial analysis, and other services that are typically only available to larger corporations.

Here are some of the main benefits that businesses – especially SMEs and businesses who take online payments – can reap from adopting open banking services: 

  • Efficiency: it’s pretty evident that in today’s economy, growing a small or medium-sized business is not an easy task. There is a lot of financial micromanagement involved, from accounting to payroll, and open banking can help: by facilitating access to relevant financial data. Entrusting third-party providers with these tasks, owners can funnel their resources to other key areas, such as marketing and customer experience. 

A clear overview of your finances also lets you run your business and plan for change much more effectively. In simple terms – the more data you have, the better you can plan in detail and spot inefficiencies and opportunities. Open banking solutions allow you to centralise all the available data on your business finances in one place, and analyse this data with a variety of tools to glean insights. 

  • Automation: digital automation is a must in today’s world, and can be achieved by easily accessing data via integrated open banking systems. Automation is very cost-effective in the long run, not to mention its importance in a digital-first world. 

  • Innovative solutions: unlike established banking institutions, open banking providers are not limited to traditional methods. Access to new sources of financial data allows them to respond much more quickly to digital innovations. As a business, you can also react at speed to changes in demand from your customers, such as the recent shift to payment options such as digital wallets and Apple Pay. Open banking, combined with a payment platform such as GoCardless, enables these quick reactions.

  • Easier access to loans: open banking technology makes it easier to build accurate credit risk assessments for your business. The more accurate your credit reporting on your business, the easier it becomes to access the credit you may need to maintain cash flow or boost investment. Open banking technology brings all of your financial information together in one place, making it simpler to go to lenders and seek funding. 

Moreover, it accelerates loan eligibility screening, by eliminating manual submission of financial statements and other documents. Everyone involved saves time and resources, easily getting to what matters the most;

  • Light-speed payments: even the most popular payment methods – such as debit and credit card transactions – take time to be processed and land in your account. This makes it difficult to monitor your cash flow and to build funds to re-invest in your business. Open banking technology allows GoCardless in the UK to offer the faster alternative of Instant Bank Pay. It lets you take one-off payments quickly, seamlessly and securely. The payments go directly from bank to bank, cutting out the middlemen and making the process as frictionless as possible. 

At the same time, these payments are typically 54% cheaper than card transactions made online. The process consists of just three steps:

  • You send a payment request to the customer

  • We connect them to their bank, and the customer authorises the payment

  • The payment is instantly confirmed and settled

The lack of time-consuming steps such as entering payment details makes this the ideal process for one-off payments, removing complications which result in customers leaving items in the basket finalising the purchase. 

  • Reduced costs and fees: open banking helps merchants reduce their service fees, as it doesn’t require them to rely solely on card payments. Open banking payment APIs remove transaction fees and most operational costs;

  • Higher conversion rates: a well-designed checkout flow, something often present in open banking payment solutions that offer multiple options, can definitely improve customer satisfaction, and therefore reduce shopping cart abandonment, which translates to more sales and more revenue;

  • Greater customer experience: this is a topic that many do not take seriously enough, resulting in a negative impact on how a brand is perceived by consumers. Open banking helps businesses deliver a more positive customer experience, by biometrically securing mobile banking payments instead of asking for login details. 

Access to more relevant data also allows merchants to better understand their customers' needs, and therefore offer more relevant products and services – making for a customer-centric approach that is paramount in today’s economic landscape.

Open banking benefits for banks

In this section:

  • Open banking allows legacy financial institutions to leverage their existing customer base and data to develop new products and services

  • Enables competition with FinTech companies and other new players in the market

  • Improves customer experience and increases customer loyalty

  • Improves compliance and security efforts

We have seen that open banking delivers multiple benefits for both businesses and consumers. Let’s now look at the traditional financial institutions and discuss the benefits that open banking offers to legacy banks.

Whenever change arises, people tend to show some resistance to it, or at least think: who will win and who will lose during the process.

When it comes to open banking, traditional banks are often seen as being on the losing side of the equation. This is mainly because the monopoly they had for decades on consumer financial data came to an abrupt end with the introduction of the revised Payment Services Directive (PSD2). 

With that, the European Union set in motion a regulatory framework that allowed the financial markets to evolve swiftly, and as we have seen this meant traditional banking institutions were no longer the sole players in the market. FinTech’s quick development and newly gained access to crucial data allowed them to challenge incumbents by offering paradigm-shifting technology, paving the way to several new products and services. 

Open banking and traditional banks: two peas in a pod

Banking has always been a very competitive ecosystem, even before open banking was a “thing”. In order not to get left behind and maintain relevance, traditional banks have always had to experiment with new technologies, despite some resistance to change.

With open banking, things aren’t really that different. It’s just a matter of taking better advantage of the same instruments they have been using for a long time, spicing it up with modern APIs that allow a customer’s financial service providers to safely communicate with each other. 

How can banks and other financial institutions leverage open banking?

Open banking wasn't designed exclusively to benefit consumers and businesses. Other financial institutions, such as banks, can also leverage open banking to improve their offerings.

Here are some of the benefits that traditional banks can reap from open banking:

  • Collaboration is key: the financial world is ever-changing, additionally we have seen a global pandemic transform the way people think about banking, money, and life in general. If in the past there was some rivalry between incumbent financial institutions and FinTechs, today we can look at partnerships as a way to keep customers engaged. Traditional banks who choose to do so have a competitive advantage, and multiply their potential to keep up with emerging solutions that are much more attractive to the common user;

  • Customer-centric experience: competition shouldn’t be a bad thing. Innovation in the financial space led a lot of traditional banks to develop engaging mobile applications and improved online banking experiences. Digital transformation and a customer-centric approach are crucial to develop customer engagement and satisfy the needs of existing and prospective users;

  • New tech means better products and services: open banking levelled the playing field for new players in a market that was previously exclusive to legacy banks. As a result, traditional banks never felt the urge to innovate, something that changed with the introduction of FinTechs that were rapidly developing and implementing innovative financial solutions;

  • More data, better decisions, more revenue: opening relevant financial data to third-parties improves everyone’s ability to make informed decisions in a timely manner, including banks’. Better predictive models can have a decisive impact on strategy, and this is true for FinTechs and traditional banks alike;

There is just no way we can ignore the powerful benefits of open banking for the financial markets and the economy as a whole. 

Recent events changed the way people think about finance forever, and the whole industry had to adapt. FinTechs have proven themselves as a credible alternative powered by digital evolution, and traditional banks simply can’t let the opportunity pass to extend and improve their offerings through open banking technology.

Traditional banking is changing, and is surely changing for the better. Consumer trust is on the rise, and an increasing number of institutions are adopting open banking as a way to ensure sustainable growth.

Open banking: next-gen digital services that benefit everyone

This new era of financial data sharing allows even smaller companies to compete on the same playing field as their bigger counterparts.

All of this translates to a new generation of financial services, especially in the digital space, that have the potential to:

  • Reduce costs and time by streamlining legacy procedures;

  • Enhance reliability by introducing zero-trust cybersecurity protocols like Strong Customer Authentication (SCA);

  • Aggregate several accounts in one place for a better overview of your overall financial situation;

  • Provide data that can be used to upgrade the decision-making process;

  • Improve risk assessments, which can positively transform the lending industry;

  • Quickly make and receive payments, removing unnecessary costs;

  • Increase customer satisfaction, boosting retention and monetisation;

This constant stream of new information grants the power to develop greater products and services that address the specific needs of individual customers and even whole markets. 

Everyone wins, from the typical consumer to the businesses striving to get awesome products to the market, not forgetting traditional banks that can modernise procedures and present themselves as credible alternatives to FinTechs.

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