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Over the last couple of years, open banking has taken the world by storm, and this is true for markets ranging from the UK to Singapore and Europe to Malaysia. While every nation has adopted either of two approaches to embrace this new standard of banking, several markets around the world are now experimenting with advanced applications of open banking, such as open finance, and how lenders can use open banking to their advantage.
While the benefits of such applications are new and implemented correctly, they can quickly empower institutions to gain a competitive edge.
What is Open Finance?
Open finance takes the concept of sharing consent-based customer information one step further and instead of limiting it to information collected at the bank’s branch or other digital channels (web and mobile), it proposes that the customer’s entire financial information ranging from card and wallet transactions to insurance premiums and credit utilization be aggregated at a single portal.
As you can understand, open finance expands the fundamentals of consent-based customer data sharing beyond core financial institutions and thus promotes a fully data-driven outlook, one of the greatest benefits of which is reserved for lenders.
At present, lenders are limited by the data provided by credit rating agencies and big banks and thus need to overcome multiple hurdles if they need to develop an alternate credit scoring model. Along with this, as the data is limited, current credit decisioning models are not only limited in terms of accuracy but also turnaround times, both of which cost lenders thousands in revenue every year. Open banking proposes a solution to this by empowering lenders with streamlined access to a wide catalog of data such that they can efficiently address the above problems and more.
Advantages of Open Finance
The advantages of open finance are multi-fold to all stakeholders in the financial value chain as it promotes a completely data-driven approach. Some of the most significant of these are:
- Alternate Credit Scoring Algorithm
As lenders now have access to varied sources of customer data, they can design an alternate credit scoring algorithm from the ground up, which will not only take into account scores shared by credit scoring institutions such as Experian and TransUnion but take the customer’s entire financial information into account to arrive at an accurate underwriting decision at a faster turnaround time. This will not only help the lender serve customers faster but also drastically increase its profitability. - Faster Loans
In lieu of the earlier point, lenders leveraging open finance can arrive at underwriting decisions faster, thus empowering them with a competitive edge. In addition to this, by further optimizing their internal processes, lenders can reduce paperwork and manual processes, all of which significantly contribute to a delightful customer experience. - Personalized Offerings
The modern borrower thrives on personalization and with access to new sources of data, lenders can easily hyper-personalize their products to meet the exact needs of the end customers. This will not only contribute to drastically higher sales but also significantly increase customer loyalty as it will essentially boost your brand image and credibility to one of customer-centricity. - Healthier Competition
By utilizing open finance, fintechs and start-ups can compete with industry leaders on a level playing field, thus promoting healthy competition. This will not only encourage innovation among traditional institutions and contribute to the overall development of the industry but also benefit the customers in terms of competitive interest rates, loan tenure, and more. - Better Risk Management
Last but not least, by tapping into open finance, lenders can efficiently tackle one of their biggest business challenges, i.e., NPAs or Non-Performing Assets. By expertly scoring customers based on their past financial behavior, lenders can better their odds of choosing borrowers who have fewer chances of default. This will not only lead to a more balanced portfolio but also open additional sources of revenue as the lender will now have access to some of the most creditworthy borrowers.
Ongoing Challenges
While the prospects of open finance are bright, its real-life implementation is not free from challenges. If institutions want to pioneer this concept, they will need to overcome several challenges, such as
- Consumer Distrust: According to a latest research by Zopa, more than 63% of consumers have never heard of open finance and at least 26% don’t want institutions to have access to their financial data. Another research by YouGov concluded that only around 44% of respondents in APAC trust digital only banks as compared to 73% in case of traditional ones. These metrics make it evident that consumer distrust is widespread at this moment, making this one of the first challenges institutions need to overcome.
- Data Security: While open banking APIs are designed to be secure, aggregating all the financial information of a customer at a single portal does raise significant data security concerns. This is evident in the fact that 20% of customers, as per Zopa’s research, are not comfortable with open banking due to data security concerns. One possible solution to this is acquire an ISO27001 standard as it ensures that the organization has appropriate data security infrastructure in place to appropriately gather, store and analyze highly sensitive data.
- Lack of Government Oversight: While governments have drafted open banking policies to regulate the ongoing developments, experts agree that there is a long way to go, especially for developing nations such as Malaysia and Indonesia. Without strict regulations, institutions will be forced to self-regulate, and this can quickly become a serious concern given the humongous amount of customer financial data open finance initiatives propose to collect and analyze at a single portal.
Conclusion: An Opportunity to Lead the Change
As open finance is still in its infancy, early adopters can partner with established vendors to take advantage of this and become market leaders by experimenting with potential applications of this concept. By closely collaborating with a technology partner, early adopters can work hand in hand to resolve the ongoing challenges by leveraging the solutions vendors have pioneered (such as acquiring an ISO 27001 certification for increased data security) and brainstorm potential solutions to challenges of the future. This will not only give them a competitive edge but also promote their greater goal of financial inclusion.
Codebase Technologies is a market leader in open banking solutions. Speak to our experts today and discover how we can make your open finance goals a reality.
Tagged:
- apac, Open Banking
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Raheel Iqbal, Managing Partner
Experienced Board Member with a demonstrated history of working in the financial services industry. Skilled in Business Planning, Management, Employee Training, Financial Accounting, and Product Development.
