When it comes to open banking, the potential use cases are bound to spark your imagination. Far from exhaustive, this final installment, Part 4 of our blog series, examines the most popular use cases across retail, commercial banking and wealth management.
Part 1: Unlocking the Future of Finance: Navigating the Rise of Open Banking in America
Part 2: Breaking Down the CFPB’s Announcement
Part 3: The Dawn of Open Banking in Canada
Part 4: Open Banking Use Cases: Show me the Money
Reminder of how Open Banking works - See Part 1 for details.
Source: Financial Data Exchange: 8-15-2023 ‘Getting Started with Open Banking’
The value of open banking transactions worldwide reached 57 billion U.S. dollars in 2023, and it is expected to increase sharply.
The number of open banking API calls is estimated to 580 billion in 2027, signaling the rapid expansion of open banking services and their integration into various financial ecosystems.
Non-exhaustive list of Open banking use cases examples
1. How Consumers Benefit from Open banking
Account Aggregation
Account aggregation is among the most favored features in financial services. Many companies already provide this service through APIs, enabling customers to view an array of accounts all in one interface. This feature allows users to conveniently monitor their credit cards, investment accounts, and loan balances together. It even integrates consumer and business banking, showcasing everything from multiple providers in one streamlined dashboard.
Personal finance management
The recent surge in personal finance management (PFM) tools has transformed how customers view and manage their finances. These tools provide a comprehensive snapshot of one’s financial health, categorizing expenses and displaying remaining monthly budgets, all through a unified interface that aggregates data from various accounts.
Centralizing this data not only offers banks and financial providers clear insights into customer needs but also empowers consumers with a detailed understanding of their financial performance. This creates valuable financial insights.
While financial and wealth management are longstanding practices, open banking has significantly expanded the capabilities of PFMs. It enables banks to integrate their own APIs across various business units and facilitates connections with APIs from other banks. This evolution in open banking has led to a wider array of financial management services, thereby enhancing customer choice and allowing providers to deliver customized products more effectively.
Examples: Akoya, Envestnet/Yodlee Spiir, Mint
"In this new era of open banking, smaller banks will have the opportunity to compete on a level playing field with larger institutions. The ability of smaller financial institutions to launch new products, tools, and customer benefits enabled by open banking data will drive their growth and improve customer retention.[1]"Farouk Ferchichi - Group President, Envestnet
Instance credit risk
Open banking dramatically streamlines credit applications by providing lenders with an almost instantaneous overview of an applicant’s credit history. Previously, assessing creditworthiness was a cumbersome process, requiring the collection of various documents from multiple banks and institutions, which not only delayed credit provision but also deteriorated the customer experience.
With access to a wealth of instant banking data, lenders and underwriters can now make faster, more informed decisions. Additionally, consumers can swiftly identify the financial products they are most likely to qualify for. Instant access to credit risk assessments enables them to use comparison sites for loans and credit cards, getting pre-approval indications before making formal applications. This rapid assessment capability has significantly fueled the growth of Buy Now, Pay Later options within the financial sector.
Subscription management
While account aggregation and PFM services are already established, subscription management is a relatively new addition. This feature provides both insights and control over one's finances by detecting all recurring payments and displaying them in a single interface. These could range from streaming services and gym memberships to utility bills and mortgage payments. Customers can easily manage these recurring payments, for example, by canceling unwanted subscriptions or receiving alerts for upcoming dues.
The integration of subscription management within open banking platforms allows for effective oversight of various transactions, especially when a single interface can consolidate recurring payments from multiple accounts across different banks. For banks and financial institutions, this can translate into reduced customer support costs related to recurring payments, improved customer retention rates, and enhanced opportunities to cross-sell financial products.
Opening new accounts
Opening a new bank account has become significantly easier and quicker, thanks largely to advancements in the Know Your Customer (KYC) process. Banks traditionally gather extensive information from new customers before opening an account to ensure security and minimize fraud risk. Additionally, this onboarding process aids in profiling the new customer.
Open banking facilitates the seamless transfer of bank data, ensuring that critical information such as address, occupation, income details, name, date of birth, and credit history are all accurately synchronized. This efficiency transforms the account opening process into a smoother experience for customers, making rapid account setup not just a convenience but a competitive necessity. As the first online interaction a customer has with a bank, the digital account opening sets the bar for their expectations regarding speed and user experience, particularly for certain customer segments.
Account portability
The Consumer Financial Protection Bureau (CFPB) has already announced the 1033 rule expected to be final in 2024, empowers consumers by giving them more control over their financial data. This could lead to better financial management tools and services tailored to individual needs. For instance, the rule will enable consumer’s financial data portability to easily move their bill pay data from one bank to another, similar to U.S. phone number portability regulations enacted years ago.
Wealth register for Wealth Management
Here is another example from Heirwealth, which, by partnering with Envestnet, helps families streamline the intergenerational transfer of wealth. This partnership removes the need to search for papers and accounts or go through a discovery process of critical information during the stressful time following a parent's passing.
2. How Banks and Credit Unions Benefit from Open Banking
Acquiring new customers
Many organizations view Open Banking as a strategic opportunity to acquire new customers. Central to this strategy is the deployment of digital engagement tools that are efficient, simple, and intuitively designed. Fortunately, with access to transactional and statement data, organizations can now gain deeper insights into a customer’s financial status. This enhanced data can be leveraged to identify the most suitable customers for onboarding.
Transactional data reveals extensive information about a customer’s financial behavior. Access to this detailed behavioral data allows organizations to segment and prioritize customers based on their risk, lifetime value, and growth potential. It's crucial to consider how you can enhance the insights you already possess to better align the risk profiles of targeted customer segments with your credit risk strategy. Open Banking offers a significant opportunity to revitalize your growth strategies and refine your acquisition processes.
"Worldwide spend on retail media networks, the catchall term for the advertising sales units of retailers and other companies, will account for 21.6% of all digital ad spending in 2024, up from 15.1% in 2019, according to forecasts from market research company Emarketer."[2] Wall Street Journal April 3rd, 2024.
Upsell and cross-sell with personalized customer digital profiles
Banks possess substantial brand equity, and as established entities, they are ideally positioned to become advocates of Open Banking. But what’s the rationale behind this?
Traditionally, many banks have relied on a limited scope of data, focusing primarily on demographic and personal preferences. However, harnessing the transactional data within your systems opens up new avenues for analyzing customer behavior.
This analysis can help identify the most advantageous data partnerships for both the bank and its customers. For instance, transactional data can pinpoint frequently purchased items, enabling banks to offer targeted discounts in collaboration with retail partners. Such initiatives not only enhance service personalization but also strengthen customer relationships by showing a deep understanding of their needs. This strategy not only improves customer satisfaction but also enhances loyalty and growth potential.
Balance multi-channel touchpoints
As the digital landscape continues to expand, some customers still prefer face-to-face interactions, especially when it comes to seeking financial advice. Therefore, it's crucial that multi-channel touchpoints are integrated seamlessly. Open Banking offers a unique opportunity to provide a service that allows customers to transfer their data seamlessly across various channels. Consequently, this enables you to deliver a consistent and smooth customer experience, ensuring reliable verification across all points of contact.
Reducing debt
Open Banking offers a strategic opportunity to tackle some of the issues related to debt, presenting a unique chance for customers to minimize their risk of falling behind on payments.
By accessing transactional data, you gain a deeper understanding of your customers' financial situations. This insight allows financial institutions to collaborate with them in managing their finances more effectively, offering value-added services like alerts and support for those facing financial difficulties, with a comprehensive view of their entire financial portfolio.
KYC (Know Your Customer) and onboarding for Wealth Management
Open Banking's ability to access personal banking data offers wealth management services, particularly digital platforms, a chance to streamline their onboarding process. Essential information required from a new user—such as their name, address, monthly expenses, and available funds—can be instantly retrieved via an API call to their bank account. This convenience spares users the hassle of manually inputting their data.
Such enhancements not only increase conversion rates and reduce errors but also ensure a smoother onboarding experience. In a competitive market, the simplicity and ease of account creation are crucial. The easier it is for customers to sign up, the more likely they are to complete the process and recommend the service to others.
The "shoebox syndrome" of Financial advisers
Effective wealth management begins with the discovery phase, where advisors gather detailed client information to devise optimal financial strategies.
Known by financial advisers as the 'shoebox syndrome', refereeing when a clients forgot to bring their financial documents they left under the bed in a shoebox, current onboarding and discovery procedures are predominantly manual and burdensome, consuming time that could be better spent on meaningful discussions that lead to superior advice.
More critically, the static nature of these processes restricts advisors' capacity to offer proactive guidance as clients' circumstances evolve.
Utilizing APIs to access banking and investment data would transform the data gathering process for both clients and advisors, shifting the discovery phase from a static, one-time event to a dynamic, ongoing process. By continuously analyzing client data, advisors can proactively engage in meaningful conversations whenever there are significant changes in a client’s portfolio or income. This approach not only enhances the quality of advice given but also leads to more responsive and effective investment strategies.
Credit card segmentation
Credit card offerings are becoming increasingly diverse, with a range of additional perks and services that make choosing the right card challenging for prospective customers, especially when they have to compare options across different financial institutions. This process often feels disconnected and isolating, leaving customers poorly informed as they try to select the most suitable card.
Open Banking allows issuers to pull together a customer's past transaction history to gain a comprehensive view of their spending behaviors. With this information, issuers can tailor the card selection process, recommending cards that best match the customer’s spending patterns and lifestyle preferences. Additionally, issuers can minimize risk related to storing credentials by adopting a one-time data sharing model.
By providing a personalized and data-driven card selection process right from the first interaction, financial institutions can streamline the onboarding process and enhance customer conversion rates. This approach not only simplifies the application process by leveraging income and other relevant data points but also enhances customer satisfaction and offers valuable insights for future product innovations.
Helping customer assessing their retirements capability
Customers often feel overwhelmed and uncertain about their readiness for retirement, a feeling that intensifies when their retirement funds are dispersed across various sources such as public pensions, private pensions, and individual savings and investment products. This complexity can deter many customers, especially those without access to financial advisors, from initiating their retirement planning.
Open Banking provides financial institutions with the ability to develop a customer-facing digital tool that consolidates existing banking data to identify significant gaps in retirement planning. This tool can also be used by internal advisors to foster more informed and advice-driven conversations during discovery and financial planning sessions with clients.
This tool enables financial institutions to expand their prospective client base at the top of the funnel by encouraging users to evaluate their retirement readiness. For financial planners or self-directed investment services, it serves as a powerful new mechanism for customer acquisition, enhancing the efficiency of the onboarding process through the generation of prefilled documents and facilitating more tailored discussions.
According to Nielsen, credit card fees totaled $126 billion in the US in 2022, marking a 20% increase from the previous year and doubling since 2013. Credit card swipes have now become the third highest cost for restaurants, following labor and food expenses.
Credit card refinancing
Many consumers maintain balances on their credit cards, despite it being one of the most costly methods of borrowing. Typically, financing options are restricted by exclusive agreements with merchants, limiting their availability and impacting credit scores.
With access to credit card purchase history, lenders can offer installment-based refinancing for purchases made with any merchant or card. This data allows lenders to quickly evaluate a borrower's creditworthiness and financial capacity, enabling them to pay off the card balance immediately. This approach not only makes borrowing options more accessible but also assists consumers in avoiding high interest charges and fosters a better understanding of their true financial affordability based on cash flow.
Consumer cash flow management
While consumers generally recognize the importance of managing their finances, many still face financial anxiety. This anxiety is often driven by the complexity of managing their liquidity and the extensive effort required to balance cash flow across spending, borrowing, and saving.
Open Banking can simplify financial management by consolidating transaction accounts to offer a comprehensive view of all money inflows and outflows. Consumers can opt to automatically allocate funds to cover all commitments—from utility to credit card bills—coordinated with their paycheck cycles. This means consumers can focus on just one figure: their remaining spendable balance, ensuring they never miss a payment. Additionally, financial institutions can leverage this data to identify and suggest ways for customers to save money by switching to more cost-effective financial products and services with recurring payments.
3. How Corporate Banking Benefit
Real-time cash management
Real-Time Payments (RTP) from The Clearing House, launched in 2017, and from the Fed with FedNow since last year, offer many advantages for corporations. Corporate treasurers expect to manage their cash and accounts in real-time from anywhere, with global visibility across all their accounts and the countries where they do business.
Open API connectivity enables the aggregation of real-time cash positions. The integration with ERP and Treasury Management Systems provides a centralized view of figures from all bank accounts, offering immediate and unprecedented visibility of cash flows. Practically, this eliminates the need to log into multiple banking portals or systems to download and consolidate bank statements and transaction data. Additionally, it removes the constraint of cut-off times for intraday statements, allowing data to be reconciled instantly as it arrives in your chosen system.
4. The case for Hyper-Personalization: AI to the rescue
By now, you can how Open Banking and Open Finance can help financial organizations to create a digital profile of their customers. Combining Open Banking with AI will enable them to automate many processes at scale.
Here are two examples:
Travel & hospitality
Like retail, the travel and hospitality sector is defined by distinct customer needs throughout the buying journey—from researching options online to preparing for the trip and sharing experiences.
For instance, personalization is often missing in travel and hospitality booking platforms, particularly online, where the landscape is highly fragmented with little coordination between platforms. As a result, travelers frequently have to interact with multiple providers to organize different stages of their journeys, repeatedly inputting the same details.
Another significant inconvenience is the hotel check-in process.
After a long journey, travelers often face long lines, only to have to provide numerous details at the front desk. Similarly, checkout can be slow and tedious, with delays in receiving invoices and receipts. These processes are also labor-intensive for hotels, which must manage each guest's administrative needs individually.
"Open banking offers solutions to many of these challenges. For example, payment innovations through API-based services can reduce merchant payment costs and minimize fraud risk. Identification can be verified through bank account ownership, while customer transaction data can be used to tailor recommendations and enhance personalization, benefiting both businesses and customers."[3]. BCG & Klarna Kosma.
Auto dealership
Similar to the Travel & hospitality example, Open banking can streamline various business processes, allowing dealerships to present personalized offers to customers before they even search for a new car, improving conversion rates. It simplifies customer identification and automates credit scoring, reducing approval times and lowering default and fraud rates. This technology also enables more precise credit assessments, which allow dealerships and OEM financial services to provide pre-approved offers with attractive financing options tailored to the customer's financial situation, enhancing online interaction and purchase opportunities.
5. Conclusion
As you can see, there is no shortage of use cases for open banking and finance. Once screen scraping is eliminated due to the CFPB final ruling, secure permission-based data sharing will open the door to a flood of new, streamlined digital processes across all industries. This will forever change the way consumers manage their money, accounts, and personal data. The same applies to commercial banking and other financial segments.
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