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How Open Banking Finds A Place Among Traditional Banks

Forbes Business Development Council

SVP – Global Digital Strategy and Solution Head at Coforge 

Increased adoption of “open banking” and the consequent rise of digital banks and fintech companies has put the traditional banking model under threat. There are several new competitors in the market claiming more agile digital products, innovative user experience and data leveraged to generate insights and provide customized products and services. On the other hand, new regulations such as open banking are emerging, encouraging the opening and controlled exchange of bank data through application programming interfaces (APIs).

What is open banking?

The open banking system unfurls banks’ APIs for third parties to access in order to develop new apps and services. This can provide account holders more options when it comes to financial transparency.

An open banking framework reports the following advantages:

• Potential to increase revenue streams while expanding customer reach for financial institutions.

• Create revenue-sharing ecosystems, where incumbents give customers access to third-party-developed services while profiting from a subscription or referral basis. 

• An open architecture avoiding massive monoliths or excessive dependencies on single companies as potential bottlenecks.

Ripe For Disruption

Open banking APIs are causing massive disruption to the banks, which have traditionally evolved in a closed world where they had full control over all the information. In the last few years, regulations such as PSD2, new technologies and innovations from start-up fintech companies are changing the banking culture. They’re also creating new services for customers and clients. The move towards open banking is ripe. Regulations, the market and demand from customers for new services are forcing a new way of thinking.

The Fear Of Disruption

Open banking requires a change in thinking and will need the banks to scrutinize many of the processes and the traditional way of doing things. This fear of disruption and the loss of control is leading many traditional banks to take a sluggish approach. However, resisting the change is no more a viable option given the market pressures. Most banks have embarked on a digital transformation, as an open banking framework can offer a significant opportunity for banks to rearchitect their system using a “composable architecture” framework. 

How To Leverage An Open Banking Architecture

The composable architecture allows for the design and delivery of financial services based on the rapid and flexible assembly of independent, best-for-purpose systems. This is made possible by an open API architecture that integrates best-of-breed business functions. A mosaic of business functions is better than a monolith (pre-integrated platform). Traditional banking software was designed as a pre-integrated set of business functions that were self-contained. These functions did not allow for interoperability using API’s.

The Opportunity

Innovation and collaboration are key to staying competitive in the digital age. Banks have the opportunity to partner with fintech’s to provide best-of-breed services. New regulations create opportunities for businesses while open banking is poised to alter the way banks do business. It’s an opportunity for banks to evolve digitally. Open banking regulations are driving banks to technology that’s providing them with the means to collaborate with the right fintech partners, to help them excel in today’s digitally driven world. With new technology, banks will be able to better access and mine the data they already own to create individualized services their customers want.

Final Words

Open banking is growing at an exponential speed. One report shows a growth rate of about 24% and predicts it will reach $43 million in size by 2026. This adoption has been further accelerated by the pandemic but part of a predictable shift in the financial sector. Open banking is likely to enable the creation of open finance, as it starts redefining customer interaction with the financial system and who owns and manages financial products and services. 

All is not lost, the traditional banks will eventually learn to survive along with the fintech, through collaboration, quick adoption of newer technologies and leveraging their data asset. At present many banks have yet to accept the disruption happening in their business and are stuck between change and their traditional models. 

In the new paradigm of open finance, I believe banks will need to collaborate with fintechs and possibly with the big techs such as Google, Amazon and Apple. This will enable banks to deliver more value to customers than they had previously done in their closed environments. The future is for the brave who move quickly and consider the open banking environment.


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