The Revival of the Banks — How open banking is heralding change for traditional banks

2019 was the year of the fintech companies, and traditional banks had to scramble to keep up with the change that swept the financial services industry. It is understandable to think there is little hope left for banks as we know them, however with open banking, could banks be making a comeback?

For some background knowledge on open banking, our short article here can get you up to speed. This article will be touching on partnerships between bank-fintech companies, learn more about the partnerships here.

The traditional banking industry has suffered from a massive erosion of trust brought about by the shaky world economy, lack of variety for their diverse customer base, and perceived slowness among others. Fintech companies have taken advantage of these problems to put in their roots in the financial market and they are gaining the influence and trust of the customers quickly.

To avoid being completely relegated to the background, banks have had to rely heavily on the advantage that they have over fintech companies: Data and scale.

However, to survive the next decade, banks must give these advantages up in order to access the benefits of partnering with fintech companies. These benefits include a greater variety of products, access to a growing customer base of a tech-savvy and price-sensitive generation of people and quicker response with the use of technology among others.

By partnering with fintech companies, banks have been able to provide numerous benefits to their customers. Fintech companies provide already tried-and-tested products to the banks and the banks put their name and brand reputation behind it, creating a synergy that is beneficial to both parties.

Open Banking APIs are the framework for banks-fintech companies partnerships, and several countries are realising the importance of creating guidelines for these partnerships to happen seamlessly.

Here are regions where these are taking off:

  • The European Parliament ratified the second guideline of payment services (PSD2) in 2016, making it the first open banking regulation. The regulation requires banks to make their data available to third parties in order to ease entry for new players and promote healthy competition among others. Read more about the regulation here.
  • The HongKong Monetary Authority (HKMA) is currently in mid-implementation of a four-phased approach aimed at encouraging the adoption of open banking in the country. The phase 1 of the approach mandated that banks put up their product information where the general public can access it. Phase 2 of the approach set an October 2019 deadline for banks to allow fintech companies onboard customers using the bank’s data upon customer’s request. Read more about how the HKMA is encouraging open banking in Hong Kong here.
  • The Central Bank of Brazil published Announcement №33,455 in April 2019. The announcement established the framework for the implementation of open banking in the country and is aiming to increase the efficiency of the credits and payments markets in Brazil, improve security for all the parties involved and also promote a competitive business environment in the financial industry.
  • Australia is set to make a big push on its open banking standards in February 2020 that will change how its major banks (Westpac, Commonwealth Bank, Australia and New Zealand Banking Group (ANZ), and National Australia Bank (NAB)) and accredited parties are expected to share customers’ data. The body overseeing Australia’s financial services industry, Australian Prudential Regulatory Authority (APRA), is also aiming to reduce regulatory barriers to ease entry for newer and more innovative parties into the financial industry of the country.
  • In Nigeria, the Open Technology Foundation (OTF) is driving the development and adoption of Open Banking standards. The aim of the foundation is to ensure that account holders in the country can ‘seamlessly and securely link their bank account information with their platform or apps of choice.’ According to the official website, through the Open Banking API, a fintech company can quickly create secure and personalized products and apps for its customers. Read more about the body here.

Examples of how open banking is being adopted in Nigeria :

First Bank and Migo (formerly Kwikmoney): Migo is offering microloans to First Bank’s retail customers who may not have the documentation required to apply for larger bank loans. These microloans are disbursed in minutes and are paid directly to the customer’s account through a mobile app.

The result: Migo has access to the vast customer base of the bank, in turn, the bank can provide better and faster service to a section of its customer base that it may have turned away otherwise, thereby improving its brand image.

Kaoshi and Sterling bank: Kaoshi is helping Sterling Bank (among other Nigerian banks) innovate in the cross border money transfer space by leveraging on the open banking API technology. The fintech company provides a platform where bank customers can access a peer-to-peer money transfer market with cheaper fees than is currently available through banks.

In this case, Kaoshi provides the technology while banks grant access to their customer base, reducing the pressure on their foreign exchange supply.

In the coming decade, open banking will allow banks to increase their relevance, improve their services and access new markets. These will be possible through effective partnership with fintech companies and leveraging on the unique advantages they both have.

While banks will lose some control, it is imperative to note that the benefits of open banking for customers, banks, and fintech companies have the potential of outweighing the risks if properly harnessed.