Open banking is the next frontier for financial institutions. As a methodology, open banking stands to radically transform customer engagement within banking services – reminiscent of the way online banking did 20 years ago. This will have a knock-on impact on customer expectations, driving a need for transparent and seamless engagements with brands across every industry.

But what actually is open banking? To future proof their organisations, business leaders from across every sector must understand open banking and consider the inherent opportunities and threats that it presents.

What is open banking?

Open banking requires big banks to permit their customers to share their own transaction data with third parties of their choosing. This puts the power of data – from how money is received and payments made – in the hands of consumers through a set of open APIs.

While it originated as a regulatory requirement, the goals of open banking are geared towards enhancing levels of customer choice. Regulations and the enabling technology have the potential to allow consumers to seamlessly access and share their financial data through their existing bank or other service providers.

With more visibility into their consolidated transactional data, they will potentially be in a better position to compare offers and get more appropriate products and services at a lower cost. This has the potential to increase competition, personalisation, and innovation across financial services, as customers will be able to move to new financial services providers – taking their data with them – faster than ever before.

Are customers really in control?

Through its open exchange of data, open banking transforms transactional data into a valuable asset to help customers better manage their finances and quickly switch providers.

For example, if a customer can get a better rate on their mortgage from another lender, the new bank can quickly tap into the data from the customer’s old bank without the need for redundant, time-wasting application forms. This will make it much easier for the customer to switch and, conversely, for banks to attract new customers.

Knowing how much easier it is to switch, incumbent banks will be far more motivated to proactively ensure their customers are satisfied and will be more likely to offer better deals to keep them from leaving. In addition, the customer can be made aware of potential rebates (such as CTP refunds in NSW) or allowances they may not be claiming.

Customers will also have the ability to look at all of their accounts and financial information in one place. This allows them to set targets, create budgets, and anticipate liquidity based on, for example, their typical utility bills.

As a result, both customers and businesses will benefit from increased competition and enhanced products and services.

The learning for business leaders

Open banking will reset the bar for integrated, tailor-made, digital connections between organisations and individuals. Furthermore, it changes the tone for customer experience across other industries such as utilities, travel, health and retail.

For financial institutions, open banking can yield many opportunities, but failure to embrace it poses significant risk as there are a number of emerging start-ups and fintechs rising to meet the changing consumer expectations. Established players that fall behind may quickly be faced with increased customer attrition and market irrelevance. We are already seeing evidence of this in other markets such as the UK, where newer challenger banks are setting up arrangements with third-party product providers to demonstrate the real benefits of open banking.

For business leaders in other sectors, open banking represents an upcoming seismic shift in customer experience and expectations. As open banking is rolled out, we will see a growing focus on personalised offerings and services, alongside a need for transparent and seamless engagements across sectors. The importance of data access and sharing will continue to grow, paving the way for similar legislation in other industries.

With this in mind, business leaders across the world must be thinking about:

  1. Establishing differentiated products and services, based on an understanding of how they will need to evolve with open banking APIs (or similar)
  2. Keeping pace with innovation, in particular understanding the value of data to drive highly personal and relevant conversations with customers
  3. Creating new distribution channels and partnerships, with a focus on understanding the increasing role of transparency and collaboration in today’s economy
  4. Building technology resilience (focusing on securing data) for the open banking regime

It’s early days for open banking, with potential for it to morph in many different directions, but one thing is certain: the relationship between customers and organisations is evolving quickly. To get ahead, organisations must put the customer at the core of strategies and objectives, or they risk losing out on growth opportunities.

Open banking should be the inspiration for businesses looking to digitally transform right now. Early adopters of open banking-style initiatives will have an advantage through access to unparalleled customer data and insights. Those that make these insights actionable and beneficial to customers and themselves will be the leaders of the pack, gaining market share against their competition.