Pressure from regulators and competitors is driving community banks to rethink current business models and uncover new revenue streams. Additionally, for years, bank customers have migrated toward utilizing self-service and digital transactions over visiting brick-and-mortar branches. Now, in a post-COVID world, it appears all of this has culminated in a permanent shift – a new normal. Open banking holds the key to thriving in this new normal. Today’s banks must operate more like platform companies, using modern technology to connect people and processes with assets and infrastructure that effectively moves data and manages interactions.
Most community banks utilize mixed technology stacks with mid-range backend systems handling the day-to-day processing. These traditional platforms are remarkably reliable, but they are not always conducive to interacting with newer technologies. In the past, banks looking to modernize had few options but to replace their core platforms. This was an expensive and high-risk proposition. Now banks can use application program interfaces, or APIs, to supplement their traditional platforms and fully participate in open banking.
API technology is far from new but continues to open new doors via integration. In addition to integrating front-end banking services, such as mobile banking, APIs may also integrate valuable internal services that boost efficiency and deliver real-time business processing. Combined, these API integrations accelerate legacy enablement, opening banks to countless new possibilities. From there, banks must develop and execute an open banking strategy to leverage those possibilities which will provide the greatest return on investment and help realize their vision of the future. Generally-speaking, an effective open banking strategy should focus on three key areas.
The benefits of open banking
- Higher conversion rates – Removing the need for data entry creates a seamless, user-friendly customer experience, which translates to simpler, smoother transactions.
- Increased acceptance rates – Customers can count on less failed payments at checkout. Open banking provides a 95% success rate – better than cards’ 86-95% rate.
- Lower fees – Without the transaction fees and operational costs of other methods, open banking keeps the cost of payment processing to the minimum.
- Faster settlement – Time is money, and rather than endure the wait times of cards and other payments, which can take days, open banking settles funds almost instantly.
- Zero chargebacks – Because open banking payments don’t offer chargebacks, associated fees and risks aren’t a factor businesses need to consider – and their customers remain protected.
Generally-speaking, an effective open banking strategy should focus on three key areas.
Tech-forward start-ups are flooding the banking market. Unencumbered by traditional technology stacks and protocols these “neobanks” leverage cutting edge technologies to quickly launch new products and services and perpetually push the envelope. APIs empower established banks with a solid open banking strategy to keep pace and find opportunities to lead. Pairing greater efficiencies and agility with a proven history and reputation can provide the necessary edge to fend off competitors.
Innovation is the foundation of open banking and should be a primary focus of any open banking strategy. Specifically, it’s about using APIs to unlock innovative ways to make data more accessible to customers and easier to share with third parties. Though they likely don’t realize it, the average consumer uses APIs every day whenever they conduct business transactions from their phones. APIs can be converted into countless innovative banking and financial products, creating an entirely new market. This includes real-time decisions on personal lending, geo-sensitive advertising, and the ability to harness transaction data for a more personalized customer experience.
Today’s bank customers expect banking their way, which typically means anytime, anywhere, across multiple channels. Smart technologies and frictionless customer experiences are quickly becoming an expectation across all consumer markets. To accommodate, traditional technology must connect with the latest options, at scale, while processing an escalating volume of transactions. APIs make it possible, empowering developers to quickly develop, test and enable interoperability between the latest FinTech offerings and the wealth of data served by traditional banking systems. Open banking also creates opportunities for banks to deliver data-driven, customized, and relevant offers and services catered to each individual customer.
As the banking industry continues to evolve, open banking gives community banks the tools necessary to remain at the forefront, leveraging breakthrough technologies and gaining maximum value from their data. An open banking strategy built around competitiveness, innovation, and personalization can help community banks achieve their current business goals and provide agility and flexibility to pursue new opportunities as they arise.