Open banking is the transfer of financial data and a trend that inevitably is likely to increase. While open banking empowers fintech and larger technology businesses, a report by McKinsey suggests several significant benefits for established banks and financial organisations that may have not been previously recognised.

Industry experts highlight how our world is changing and how important information is to businesses. Customers are not willing to accept a particular service or price if they are aware of better options elsewhere. Several reports from McKinsey suggest that embracing open banking is necessary and has benefits for financial institutions as much as it had for fintech and other businesses. 

The findings indicate a value to the adoption of open financial data, an increase in GDP of between 1% and 1.5% within the U.S, the U.K. and the EU.

While it’s not exactly clear how open financial data will progress, the trend towards data sharing between financial institutions, fintech and other big businesses is only going to increase. This will have a significant impact on the traditional banking industry shortly.

In the report ‘Financial Services Unchained’, McKinsey explains that if open finance continues to accelerate it could transform the global financial services system and change the concept of banking altogether. The report goes onto say that the ability for customers to gain a deeper understanding of their finances could result in margin compression, as charges and pricing becomes more transparent. McKinsey explains that banks may have to compete with margin sharing, as payouts to other digital platforms could play a bigger role in customer acquisition.

McKinsey also highlights that open financial data places big technology businesses in a stronger position to become financial services leaders. We are increasingly seeing more big tech businesses entering financial services, using open data as part of their offerings. It’s worth remembering that multiple businesses are capable of using the same data and as a result, big technology businesses will have banking partners and will continue to face several banking competitors.

Increased competition will ultimately lead to the need to understand and respond to new changes, restructure offerings, adapt business models and establish partnerships with fintech or technology businesses to drive continued success and relevance.

The benefits and value of open data

While it may sound like conventional financial businesses may face a challenging future, the report ‘Financial Data Unbound’ by McKinsey details several benefits of open financial data and specifically relate to financial institutions.

In most cases, financial data sharing is quite limited to areas within financial services, but there are several benefits to customers and small businesses from open finance.

Increased Access to Financial Services: Data sharing allows customers to purchase and use financial services that previously they may not have had access to. For example, open financial data can support the credit assessment of borrowers by measuring utility, phone bills and other factors.

Enhanced User Convenience: Data sharing can save substantial time for customers in their engagement with financial services and, more importantly, for product purchases and exit. For example, open access to data on mortgage products enables customers to apply for loans without engaging a mortgage advisor.

Improved Product Options: Open financial data can provide an enhanced range of options available for customers and create further savings. For example, open data systems make it simpler to switch to different accounts, supporting small business customers to gain the best results.

Benefits of Open Data to Financial Institutions

Fintechs and other third-party services have displayed clear benefits by having the ability to access customer banking data that was previously unavailable in conventional banks. The benefits to other financial organisations aren’t necessarily as clear, but they do exist.

McKinsey explains that the open data systems are progressing in various ways that don’t necessarily translate into a clear win-lose situation for banks and fintech. Some banks will be able to leverage open banking and take a share of this emerging market. The McKinsey report several benefits from open banking for financial institutions:

Enhanced operational efficiency: open financial data could significantly reduce costs by replacing physical documents with verified digital data, making it simpler to adopt automated technologies. This will improve customer experience by enabling quicker and more transparent interactions.

Better Fraud Protection: Improved fraud protection can mean considerable cost reductions for financial businesses and an overall improved customer experience. Sharing fraud-related data creates more evidence and insight to support detecting any suspicious activity.

Improved Workforce Allocation: Financial organisations can use open data to allocate and support their workforce, assigning particular members to high-value activities.

Improve the Data Intermediation Process: Open banking systems create direct access to data via APIs for intermediation, reducing overall friction. Data sharing decreases or eliminates the costs financial organisations experience in data sourcing with third party providers and other aggregators.