In an age where privacy regulation has become so [rightfully] stringent, banks need to figure out how best to align themselves with customer needs. Unlike the traditional role of the financial institution, banks today need to offer services to be able to retain customers. In order to offer services that match customer needs, they need to constantly analyze the data. For data analysis, banks need to abide by regulation and standards, and therein lies the conundrum: the customer needs to be in control of what information the bank has access to.
When the second Payment Services Directive (PSD2) was enforced in January of this year, Fintech access to payments and payment data came into the regulatory crosshairs for the first time. This is a major change in the industry, one that will certainly generate a lot more innovation.
What is Open Banking?
Open banking, also referred to as Open Bank Data, is meant to improve the customer banking experience. It forces large, established banks to be more competitive with smaller and newer banks, ideally resulting in lower costs, better technology, and better customer service. Open banking regulations require banks to publish, both online and inside their branches, accurate and unbiased information that lets consumers evaluate their service quality, a move towards transparency designed to motivate banks to provide the best possible customer experience. While banks are the custodians of customer money and information, their services must be equally more customer-centric. Banks also have to notify customers about unforeseen overdrafts and give them a grace period to correct the problem and avoid overdraft charges.
Gavin Littlejohn is the Convenor of the Fintech Stakeholder Group of the UK Open Banking Implementation Entity and Founder of Money Dashboard. He explains, “Banks are going to have to work very hard on innovation. They can achieve this through partners or by focusing and leverage the huge volumes of data that they already have to better understand customers needs. That is how I feel they can make the best of the opportunity.”
Customers trust with trust banks with their money, as a custodian of their money. “But when you want to overlay data-driven services, there has to be a clear guideline how banks can elicit consent to access customer data,” explains Gavin. That is how the trust relationship grows between the customer and the bank where the customer is in control of the privacy and assessing who has access to their data and choose the services they want.
Historically speaking, the clearance of a payment was based on relationship banking and the involvement of an entire ecosystem of financial institutions across borders. “We are now progressively moving to real-time settlements. So the requirement to deposit assets with the central bank to cover the risk of default is removed.” You make payments as soon as you are offered them. Gavin says, “This real-time settlement makes businesses more liquid, able to manage their money and bottom line better. It also ensures the bank doesn’t keep customer money longer necessary.”