How big threats to incumbents in open banking can benefit

How big threats to incumbents in open banking can benefit

Did Walter Wriston, CEO of legendary Citibank, widely regarded as the father of modern banking, endorse “open banking”?

The term did not exist when Liston trampled the globe as a colossal statue of banks in the late 70’s and mid 80’s. But Liston famously said, “Information about money is more important than money itself.”

Lesser known is another listonism. “Information is a business in itself. It also makes it out of control … If the customer knows that there is a better deal elsewhere, he will accept the price in one place. I can’t let you. It’s a whole new world. “

Wriston wasn’t the one who resisted change, he was all about adapting to it. I think he participates in open banking and comes up with ways to make it work for the benefit of his institution.

Two new reports from McKinsey suggest that adopting open banking benefits financial institutions not only for FinTech, but also for businesses and consumers.

Consulting firms really value the adoption of open financial data. GDP has increased by 1% to 1.5% in the United States, United Kingdom and the European Union, and much higher in some other countries, especially India.

It is not an implementation of the rule-based model used in the UK and EU, but is premised on the widespread adoption of digital infrastructure and the protection of privacy and security that allows free flow of data.

Wake up call:

McKinsey’s detailed analysis, along with recent developments, strongly suggests that if financial institutions have not yet taken steps to prepare for the world of open data, they should begin to clash with it.

In the United States, President Biden Sharing financial data In his widespread executive order on July 9, 2021. It is expected to add momentum to various private sector efforts to create an orderly approach to open data.Of financial data exchange API-based approachFor example, until recently it has been accepted by banking and non-banking companies who have been at odds with security issues specific to data screen scraping practices.

Olivia White, McKinsey’s senior partner and one of the leading authors of the unbound report, said: Make sure that unregulated promotion does not create more organizational impetus than other countries. “

As the report points out, the United States already shares a wide range of data, but lacks standardization. Private-sector data aggregators like Plaid “flow broker data between providers and users, limiting consumer control,” McKinsey said. Rule-making for the CFPB may introduce a more standardized framework, but at this time it is unclear in which direction the CFPB will go.

Why open data sharing changes banking operations

It is not yet clear how open financial data will evolve in the United States, but there is an increasing tendency to share data among financial institutions, fintech, big tech and other third-party providers. According to McKinsey, this will have serious implications for the near future of the traditional banking industry.

“In that report,”Unchained financial servicesMcKinsey said: “As open finance continues to accelerate, it could reshape the global financial services ecosystem, change the way banks think and put more pressure on existing banks.”

((( read more: How to Build a Data Culture That Supports the Transformation of Digital Banking )

The report further predicts that the ability of customers to better understand the overall financial situation (one of the promises of open banking) could lead to margin reduction as pricing and pricing transparency increase. I will. Banks may also need to work on margin sharing, as payments to digital platforms can play a much larger role in customer acquisition. “

The chart below is based on the situation in the UK and Europe and provides a visual representation of how things change.

If it wasn’t calm enough, McKinsey argues that open financial data puts a strong giant tech company in a stronger position to become a player in financial services. Google’s Plex bank account, offered in partnership with banks and credit unions, is an example of the future.

“I think the open data ecosystem is evolving in interesting ways that aren’t as simple as banks winning or losing, or fintech winning or losing.”

— Olivia White, McKinsey & Co.

“We are increasingly seeing big tech players entering financial services and using open financial data as a tool to extend their products,” White said. But she adds, “Data is more like sunshine, not oil.” That is, multiple players can use the same data. As a result, large tech companies have banking partners, but will continue to face many banking competitors, she said.

However, the consequences of this intensifying banking competition are unlikely to be a winner, and McKinsey hopes that existing financial institutions will continue to play a meaningful role. Still, consulting firms “understand and respond to these changes, rethink their products, adjust their business models, and successfully partner with fintech or technology companies to ensure continued success and relevance. It is essential to do it. “

((( read more: Consumers say “open banking” is scary, confusing and great )

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Open data has great benefits

From the above, it may seem that traditional financial institutions are facing a tough future, but McKinsey’s report says, “Unbound financial dataOutlines the seven main benefits of open financial data. Four of them are specifically related to financial institutions and the other three are related to consumers and small businesses.

In most cases, sharing financial data is still limited in many areas of financial services, causing friction, cost and reduced access, the company said.

Notification point:

According to a McKinsey study, consumers’ willingness to share financial data doubles when they find attractive products and services that they enable and understand the value they bring.

In the following two graphs, McKinsey plots the benefits of open financial data sharing. The first graph shows three main benefits for consumers and small businesses, showing 10 specific use cases.

Open financial data creates value for consumers smbs

The following is an excerpt of the three main benefits that open finance brings to consumers and small businesses, as explained in McKinsey’s report.

1. Increased access to financial services.. Data sharing allows customers to purchase and use financial services that may otherwise be inaccessible. For example, open financial data can help assess a borrower’s creditworthiness by raising rent, telephone, utility bills, and other invoices.

2. Improvement of user convenience.. Data sharing saves customers time when interacting with financial service providers. Most importantly, when the product is purchased and when it is finished. For example, the application automatically pre-populates open access to data on available mortgage products, allowing consumers to apply for a loan without using a mortgage broker.

3. Improved product options.. Open financial data can broaden and improve the range of product options available to customers and save them money. For example, the open data ecosystem makes it easy to switch accounts from one institution to another, giving retail and small business customers the best yields.

read more:

Benefits of open data for financial institutions

Obviously, FinTech, online banks, and other “third-party providers” are banking data of individual consumers who were previously trapped in banks and credit unions, even if they were only available through screen scraping practices. Already benefiting from access to. What is less obvious is the benefits of open banking to existing financial institutions.

McKinsey did not specifically mention the relative ratio of profits to banking and non-banking institutions in its analysis. However, Mr. White said: “I think the open data ecosystem is evolving in an interesting way that isn’t as simple as banks win and lose and FinTech wins and loses. Some banks take advantage of open banking to gain market share from other banks. Some people rely on Banking-as-a-Service (BaaS) to enable fintech players. “

Change of opinion:

Banks and credit unions see open banking as a compliance burden or threat. Both are correct! Financial institutions are increasingly aware that open banking can generate operational benefits and new business models.

Open financial data benefits financial institutions

The following is an excerpt of the four main benefits that open banking brings to financial institutions, as described in McKinsey’s report.

1. Improvement of operational efficiency.. Since most of the data is still in physical documents and various digitized sources, open financial data provides validated data digitally, facilitating the adoption of automated technology and relevant efficiencies. You can reduce the cost by increasing. All of this can also improve the customer experience by facilitating faster, more transparent interactions.

For example, customer profiles built on open data from other agencies can increase the use of predictive analytics and artificial intelligence in digital and interactive voice response-based call center operations. In terms of customer acquisition, the open data ecosystem helps financial institutions engage in more targeted data-driven marketing.

((( read more: Banks and co-operatives can respond well to these big data trends )

2. Better fraud prediction.. Not only does this significantly reduce financial institution costs, but it also provides real-time access to a full set of customer data, improving the customer experience. Sharing fraud-specific information and other types of data provides more evidence and clues to flag suspicious activity.

3. Improvement of labor distribution.. Financial institutions can use open data to better assign employees, target them, and assign staff to their most valuable activities.

The use of external data sources to help collection staff focus more on high-risk customers is an example. Similarly, retrieving reliable data about customers, including data stored in external sources such as social data, reduces the time spent procuring data from vendors, thus reducing product researchers and designers. Increase your productivity.

4. Reduced friction in data mediation.. The open banking system allows direct access to data using an intermediary API, reducing friction. Data sharing also reduces or eliminates the costs financial institutions incur when procuring data from third-party data providers and aggregators for lead generation and customer targeting purposes.

For example, in the United States, nearly half of all mortgage providers rely on third-party data for mortgage composition, so such data can cost as much as $ 80 per mortgage application.


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