Open Banking: the key to cooperation between banks and fintechs

The fast-paced technological improvements have shifted customer preferences and challenged big banks to act quickly on keeping up with their challengers. For the same reason, improving customer experience in financial services became a top priority for commercial banks, recently.

But how can a robust organization, like a traditional bank, keep up with the rapid change of the ecosystem while complying with regulations? The answer is Open Banking.

What is Open Banking?

Open Banking is a collaborative business approach in financial services, in which the ownership of financial data shifts from banks to the customers.

In practice, data, processes and other business capabilities of banks are made available to an ecosystem of well-selected third parties, such as fintechs, technology vendors or corporates. The process is entirely secure, electronic and only happens if the customer approves of sharing his/her information.

Under the principle of Open Banking, banks allow clients to have better control over their finances and to maximize the value they get out of financial services by gaining access to solutions that the bank might not provide yet. The outcome is an improved and well-regulated financial ecosystem where banks provide the core infrastructure, and customers can enjoy additional services, created by third-party providers, while keeping full control over their financial data.

More so, since the Europe Commission shows proactivity and Open Banking is a crucial element of their digital agenda to open up the market to innovative businesses and foster competition. They aim to motivate commercial banks to develop their products to compete with challengers, create space for innovation and give consumers a greater choice.

Budgeting as a new financial service

Even though automated budgeting isn’t typically a part of bank services, with the Spendee app, clients can better understand their spending habits and improve their budgeting, even across several credit and debit accounts.

The users of the app can connect their bank accounts, with the possibility of integrating with over 2500 banks worldwide. Once connected, the app will automatically sync their bank account movements, track the spending habits and create a detailed overview of their monthly budget — all made possible by Open Banking.

PSD2 and Open APIs changing the game

The most popular method of sharing data relies on Application Program Interfaces or APIs for short. APIs provide a secure way of data communication between banks and third parties through a set of protocols and functions. Simply put, an API at one company makes it possible to receive information from the software at another company.

The 2018 PSD2 (Payment Service Direction 2) directive of the European Union pushed banks to open up their APIs to third-parties in a thoroughly regulated process. The directive breaks down the banks’ monopoly on user data, it requires them to make data available to third parties, and ultimately, it aims to modernize the industry. Yet, PSD2 covers only a small fraction of the market, and competition is driven by which bank can deliver innovative solutions outside of the scope of PSD2.

Manage all your finance in one place with Curve

The UK-based fintech launched its card in 2016 with the mission to simplify money management for their customers. The Curve physical bank card aggregates multiple bank cards, supported by a mobile app.

Curve allows customers to use a single card for payments and withdrawals. With just one tap on the app, the user can choose which card to activate and use, instead of carrying and keeping track of multiple bank cards. The app also helps with money management and budgeting, thanks to Open Banking.

What’s in it for commercial banks?

The motivation for incumbents to enter the innovation game lies within the possibility to expand their existing infrastructure rapidly, much faster than they could do so on their own. New services bring new revenue streams and service models for the banks. Ultimately, they are reaching a better customer experience and higher levels of customer satisfaction.

At the same time, a larger profit pool for banks becomes necessary as consumer expectations are pushing traditional banking fees towards zero thanks to challenger banks, who offer free banking services.

Marketplace Banking

Recently, the scope of the ecosystem expanded a step further, into Marketplace Banking. Further leveraging on Open Banking APIs, banks can now request data from each other and create an integrated experience, quasi serving the role of a utility provider for their clients — similarly to Curve’s solution in the example.

With non-financial firms joining the ecosystem as well, customers can discover an entirely new way of managing their money as they can enjoy the benefits of various services through integrated platforms.

How can fintechs take advantage of Open Banking?

Under the Open Banking framework, financial services can be customized on a much higher level at much lower costs than ever before. Open Banking puts banks in a situation where they remain the trusted party in the ecosystem while creating further market opportunities for them. Since incumbent banks keep their first-mover advantage in the market, they usually look at most fintechs as potential partners, instead of competitors.

In fact, instead of seeing innovation as a threat, a significant portion of traditional banks are already leading the way by offering programs for fintech innovators, including the MKB Financial Group. (Scroll to the end of the blog post for more information!)

Therefore, fintechs can take advantage of the investment potential of bigger banks. In return, they can offer higher speed of development, faster decision-making, complementary ideas and technical skills to match the needs of bigger institutions. Lastly, building a service on a bank’s API brings along the potential to leverage the user base and data of a larger organization to improve the fintech’s product and grow the user base.

Example: Billingo

Do you have an innovative Open Banking idea?

Ask the regulator!

Once you come up with an idea, there is an easy way to check whether it’s viable in the Hungarian market from a regulatory perspective.

The Hungarian National Bank offers a sandbox, where you can test whether your project is compliant with Hungarian regulations. Once you sign up on the website, you’ll have access to regulators and consultants who can help to create a compliant innovation plan and share international best practices with your team.

Join our Open Banking 2020 Program!

At MKB Fintechlab, we put a big emphasis on cooperating with founders to nurture innovation within the MKB Financial Group. Our goal is to combine our resources and dreams with those who share our motivation to delight customers.

We take the right ideas and build long-lasting cooperations with founders by working closely, involving the right stakeholders in the MKB Financial Group from day 1.

Do you have an Open Banking idea that could change the future of banking?

Get in touch with us or find out more about our Partnership Program!