ARTICLE
Mambu’s Banking Insights for Growth:
Navigating the age of open finance
18 Jul 2024
Discover how education and technology are key to advancing open finance. Join Mambu and Hexaware as we delve into the transformative power of open finance and the opportunities it presents for a competitive advantage. From enhanced customer experiences to automated approaches, in this article we share advice and insights into how to overcome barriers to adoption to ensure a secure and controlled transition.
In collaboration with Frank Krieger, our Chief Information Security Officer at Mambu, and Peter-Jan Van de Venn, VP of Global Digital Banking & Business Development EMEA at Hexaware, we delve into the transformative power of open finance.
In financial services, the ability to seamlessly manage and analyse various portfolios is becoming a critical differentiator for banks. Open finance is at the forefront of this transformation, promising to redefine how financial data is shared and utilised across the industry.
However, established banks, often burdened with legacy infrastructures, face significant challenges in adapting to these advancements. The cost of updating these systems can be prohibitive, placing older institutions at a disadvantage compared to newer, more agile banks that can adapt and innovate more swiftly. For banks, embracing a modern core presents vast opportunities.
We’ll cover what banks can do to stay competitive, and the benefits they bring to consumers and businesses alike. Join us as we explore this theme, and stay tuned for upcoming installments of Mambu’s Banking Insights, where we continue to uncover what’s driving the future of banking and finance.
The path to open finance
Peter-Jan Van de Venn: First things first, we must explore what predicated open finance, and that is open banking. Open banking is a system that provides third-party access to financial data through the use of application programming interfaces (APIs).
It was introduced by regulators as a way to open up competition and increase innovation. Where open banking is centered on payment initiation and allowing access between two financial accounts, open finance spans a whole range of financial situations from insurance, investments, pensions, and beyond.
Frank Krieger: Open finance presents immense possibilities for banks, who with an API-first or composable technological architecture, can connect to platforms to the benefit of the institution and consumers.
Early adopters of open finance can leverage the shortcomings of established banks, making them less relevant by offering superior, more innovative services. By creating a "stickier" customer experience, these forward-thinking banks can capture and retain a more loyal customer base.
A holistic view of one’s finances
Peter-Jan Van de Venn: Like open banking, open finance is all about bringing a range of financial instruments into one place for the benefit of consumers and financial institutions. If you want better financial insights, you need more data, and that’s where open finance comes into play.
Open finance enables consumers to have visibility into various financial products without the hassle of logging into multiple sites. This consolidation provides them with a comprehensive view of their financial landscape, allowing for better, more informed financial decisions.
Frank Krieger: For banks, open finance offers a holistic picture that was previously fragmented. With access to a broader range of data, financial institutions can provide more personalised and effective financial advice.
This comprehensive view also aids in risk reduction, as banks can see all the pertinent information in one place. Ultimately, open finance benefits both consumers and banking institutions by fostering transparency, improving decision-making, and enhancing overall financial health.
Why should consumers and banks care?
- Enhanced customer experiences – Through open finance, customers can see all the activity of their financial lives occurring in one place, providing oversight and visibility to their financial standing across many different places. For the financial institution that allows rhythm to provide a more catered approach to serving customers. For example, FIs can see you have a mortgage or car payment and offer services along with that.
- Competitive advantage – The banks that jump on open finance will have a leg up. Not being dependent on paper information means you can provide information instantly because you have access to all of these accounts.
- Automated approach — What was previously a long, arduous process can now be improved with a more seamless, automated one. A positive side effect of this is lower operational costs for processing a mortgage, along with faster loan approval or credit decisioning times.
- Regulators — Open finance provides visibility across multiple financial products, offering a single overview of all a consumer’s finances. When this connectivity comes in place, it is more auditable, which makes bank, customer and regulator happy, all an evolution we are looking for.
Barriers to adoption
Frank Krieger: One of the major barriers to the adoption of open finance is the lack of consumer education around the topic. In order to implement this technology, consumers need to be sure it’s secure and that they are in control of what is shared.
By alleviating privacy and security concerns and explaining the benefits, financial institutions can increase consumer confidence in the technology and their willingness to adopt it.
Peter-Jan Van de Venn: Getting one industry aligned i.e. banking is one thing, but with the evolution into open finance, there are more segments to consider including pensions, investments, insurances and much more.
With this mult-industry transformation, regulator involvement and standardisation is essential to ensuring everyone has a clear framework and can adapt in an efficient way.
Time for smart banking?
Frank Krieger: When it comes to understanding open banking versus open finance – there is a common thread, which is that people are concerned about their privacy. ‘Open’ gives the impression that things are moving beyond your control.
At Mambu, we surveyed 2,000 global banking customers to get better insights about how they use open banking technology today. What we found was that 52% are unaware of open banking. For those that were aware, over half (57%) are concerned about security and privacy.
All this to say, consumer adoption will drive open finance, so as long as consumers are hesitant to share data, it will not succeed.
Peter-Jan Van de Venn: With open finance, consumers gain clarity and control over where their information is being shared and how it is used. PSD2 regulations already require sharing all transaction data, but the benefits and safety of this need to be clearly communicated to a wider audience to ensure they feel in control.
Frank Krieger: Exactly, it’s clear that education is important to make open finance more accessible. PSD3 introduces various controls such as API enhancements, simplified authentication, IBAN and name reconciliation for risk and verification. These advancements need to be effectively communicated to consumers, so they understand their value and feel confident in their financial autonomy.
In summary
Education is holding the evolution of open finance, and arguably the industry, back. Consumers want to feel that their data is secure and they have full control over how it is used. By alleviating privacy and security concerns, and explaining the value of open finance, customers will be much more on board with the idea of open finance.
Additionally, banks need to be sure they have the technology that allows them to embrace open finance in full, with a core banking system that embraces APIs and composability. This allows them to connect with the tools required to stay future-proof.
Learn more about how Mambu can support this transition with our cloud banking platform, purpose-built for agility, innovation and a changing market.
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