Why open banking holds the key to customer centricity

The proliferation of fintech platforms has prompted consumers to demand more from their banks. Historically, legacy industry resistance to securely sharing customer data with third parties has deprived banks of opportunities to engage customers and foster longer-term retention more deeply. Many incumbent banks felt an open banking structure threatened their business models. However, as banks shift their mindset and embrace open banking, it’s evident that the 'mainstreaming' of an open banking infrastructure benefits both banks and consumers through a larger marketplace of product options.

Consumers can use open banking by consenting to share their data with other providers securely and receive a more comprehensive range of product offerings and more personalized and efficient services -- all in one place.

Over time, the industry has become more accepting of open banking to meet consumer demands. The gradual phaseout of screen scraping in favor of a growing number of API-based available banking toolsets suggests the industry is responding to a customer need for greater choice based on permissions for secure third-party data sharing. Let’s take a look at how open banking is being used today to serve the customer better.

A boon for banks

Banks can grow their competitive positions by extending their offerings to include relevant third-party products. It’s pro-consumer because it presents a larger range of products and keeps consumers in banks’ product ecosystems, making relationships stickier. It’s also an innovative use case for open banking technology and a shift away from an ad-tech style of embedded banking to one where banks are opening up their APIs to open banking infrastructure providers to allow for a real-time hook into their system for prequalification and preapproval, matching and personalization. With a programmatic approach to customer acquisition based on data, open banking providers ensure customers have consented to having their financial data shared -- an opt-in process, unlike ad tech platforms -- that allows for product onboarding and matching.

For example, SoFi used an API to power customer acquisition, prequalification and preapproval for loans, credit cards, and life insurance customer acquisition via its Lantern by SoFi platform. A seamless user experience allowed for real-time, personalized offers that, according to the company, helped build a multi-vertical financial marketplace and more than double revenue and engagement.

A bank may also be able to offer products from competing institutions in cases where its consumers’ financial data is the most effective match for those products. The broader product offerings built consumer trust by offering more options for cost-sensitive consumers and simplified faster underwriting.

Interest in open banking among banks continues to grow. A recent Finastra survey revealed that three in four global banks planned to connect with an average of three fintechs in the next 12-18 months. Moreover, 56 percent of respondents said they wanted to "plug into a platform of integrated fintech solutions."

Consumers are also warming to the concept. A Discover survey released in July found that 60 percent of consumers are interested in open banking experiences, with 49 percent having three or more fintech-provided financial services apps on their smartphones.

Offering nonbanks bank-like capabilities

Fintechs and banks aren’t the only industries that benefit from open banking; the infrastructure also allows nonbank commerce and retail platforms to offer financial products, including Uber, Amazon, eBay and Houzz. Open banking APIs let financial providers -- through commerce platforms -- surface relevant products and services for consumers while shopping. For banks, partnering with nonbanks lowers the cost of customer acquisition and opens up a new source of revenue.

For example, a consumer looking for home renovation products on a social media platform might, through open banking infrastructure, be served relevant products and get underwritten for loans without leaving the platform. A customer shopping for home renovation products through the Houzz app, for example, can, through open banking APIs, be shown insurance products and loans relevant to that consumer without having to leave the app. The objective is to match financial services products with intent via lifestyle and e-commerce platforms.

Similarly, within the driver’s app, Uber drivers can apply for auto loans based on account information shared with third parties through open-banking APIs. In the same way, DoorDash gig workers can apply for loans without leaving the DoorDash app. This provides convenient, quick access to loans with information stored within the platform.

Consumers used to shopping on Amazon or eBay are accustomed to a marketplace model in which a range of products and services tailored to their needs are offered regularly. It’s time more banks and fintechs become attuned to the customer's evolving needs by providing a wider array of products and services via open banking infrastructure. Banks and fintechs can take advantage of their behavioral shift by showing consumers products that fit their needs and allow them to onboard with minimal friction. Open banking infrastructure can significantly enhance distribution channels for banks and fintechs, lowering the cost of customer acquisition while increasing trust and engagement.

Image credit: WrightStudio/depositphotos.com

Phillip Rosen is the Global CTO of MoneyLion, a leading digital financial services and lifestyle content platform. Prior to this he was CEO and founder of Even Financial, which was acquired by MoneyLion in 2022. A software engineer by training, Phill has worked with numerous startups in the intersection of data analytics, API-driven marketplaces, and ad-tech. Prior to launching Even, Phill co-founded Orchard Platform, an institutional investment platform for P2P and online lending, where he served as Vice President of Engineering. Phill is a New York City native and lives in Brooklyn with his wife. In his free time, he enjoys skiing and diving.