Consumers expect easy access to technology that improves their lives, but that technology is changing so fast that it’s often difficult for traditional financial institutions to keep up on their own. The obstacles to staying agile and keeping pace include limited dollars, expertise and time. Not to mention intense competition from all sides.

So, it’s hardly surprising that when CSI asked bankers across the country to identify the most impactful issue in the industry, open banking and the related model Banking as a Service (BaaS) claimed nearly a quarter of the vote (24%), behind only talent and regulatory change. In fact, many envision this model as the key for traditional financial institutions to meet or exceed industry expectations moving forward.

This blog explores where financial institutions stand on open banking and where these developments are headed. For more context on the opportunities in open banking and BaaS, check out our recent white paper on the topic.

An Open Banking Refresher

As a strategic approach to technology adoption, open banking enables third-party developers to access a financial institution’s data. The goal is to enable these financial institutions to offer new products or services without needing to build them internally or rely entirely on one technology provider.

This innovation model aims to ensure that core banking technology remains a Swiss army knife that gives institutions straightforward and effective command of all banking functions, including lending, CRM, deposits and digital banking. It also allows financial institutions to innovate at their own pace and create a more unified view of their customers.

There are a few flavors of open banking, some focused on expanding offerings for existing customers and some extending outward into the emerging world of open finance. All aim to future-proof the institution by improving its overall versatility and competitiveness.

The Challenges and Opportunities of Open Banking

With any developing technology, there are inevitable concerns. Some institutions may have reservations about sharing sensitive data and potential third-party data breaches. Others are wary of fintechs in general, as they can drive high expectations without as many institutional and regulatory concerns. And of course, adopting new technologies is easier said than done, as successful adoption requires thoughtful customer and employee education.

But the opportunities on the market to improve customers’ financial experiences are many. With choice, flexibility and customization, institutions can expand their revenue lines and offer exciting services like instant payments or credit scores, ultimately satisfying a demand and increasing customer engagement touchpoints.

For instance, a rising fintech star may offer an innovative lending or financial health solution that would suit a particular bank’s clientele. Open banking executed well enables the institution in question to partner with that fintech (with assistance from their open banking provider).

Ultimately, open banking’s potential to better “plug gaps” and satisfy customers better positions institutions to stay relevant and remain at the center of their customers’ financial lives.

A Foray into the Current Open Banking Landscape

Considering varying markets and institutional appetite for change, one bank’s strategy will likely differ from the one down the street, and they may both differ from the virtual marketplace. But by and large, all agree that customer expectations will continue to increase, and customers will find the services they want, even if they do so elsewhere. So, opinions about open banking vary from genuine excitement to begrudging acceptance.

Some progressive institutions (often defined as those using less than 50% of their technology from a single vendor) are paving the way with innovative banking technologies frequently targeted at niche markets. A more conservative approach might address immediate needs first and steer clear of perceived fads or bubbles. Others merge a progressive approach with a conservative one depending upon their larger business strategies.

The technology players in open banking are just as varied in structure, market and strategy and include both larger core technology providers and smaller fintech startups. Many larger technology providers also actively pursue open banking and BaaS capabilities like developer platforms, digital marketplaces and vendor portals to connect financial institutions more readily with third-party technology providers.

Industry Trends in Open Banking

Open banking isn’t entirely new, but throughout the height of the COVID-19 pandemic, most institutions focused on providing the essential digital tools to serve their customers and stay operational. New and novel applications of open banking therefore saw a slightly dampened emphasis across the industry.

Today, there is a renewed focus on open banking and some of its more innovative possibilities. Many experts anticipate widespread growth and openness in “finance.” But at the same time, many fintechs are still in the “proof of concept phase” and need to solidify themselves further to convince the banking industry fully.

Nevertheless, over 60% of CSI’s recent survey respondents purported to be somewhere on their open banking journey. Notably, those institutions that are pursuing “none of the above” open banking strategies (selected from a list that includes embedding data, BaaS and platform banking) tended to fall within a smaller asset range. This data suggests that those with more assets are investing those assets in a wider variety of open banking strategies.

The Prevalence of Platform Banking

When respondents were asked which open banking strategy they are currently deploying, platform banking (also known as embedded fintech), took the lion’s share of the votes (39%). This model consists of integrating third-party technologies into an institution’s core banking platform (the Swiss Army knife approach mentioned earlier).

For many financial institutions, whether to enter the open ecosystem is a question of whether to be one of many financial destinations for their customers or the destination. Platform banking enables banks to remain the latter as often as possible.

Research firm Celent’s recent “Previsory” offers additional insight into why financial institutions are most interested in this business model. In that survey, the largest plurality (35%) of bankers selected “innovation and differentiation” as their primary driver for adopting open banking.

These responses complement each other, as banks nationwide are already using platform banking to improve efficiency and experiences for consumers, businesses and bank staff. Use cases include improving digital banking, connectivity, workflow integration and payments. Using technology partnerships to satisfy niche market needs also stands to increase in the foreseeable future.

Growing Interest in BaaS

For optimistic institutions, open banking poses near-infinite opportunities to expand market share and drive revenue. BaaS is one of the most buzzworthy topics, as it can circumvent customers needing to seek out a bank by instead enabling it to meet customers where they are.

Through BaaS, core vendors and specialized fintechs help build custom interfaces, solutions, analytics and security services for the bank. In so doing, financial institutions can provide the latest technology with faster-to-market solutions. They can also profit from fintech products via interchange income, subscriptions or similar methods, monetizing without charging existing customers more.

When asked about the most significant opportunity in BaaS, 32% of respondents saw BaaS as an opportunity to streamline operations, and almost a quarter (23%) are eyeing it to create new revenue streams. 54% were very interested in BaaS overall, as the strategy could enable them to expand market reach, especially for those smaller-asset institutions that have yet to start.

However, only 14% of traditional institutions self-reported as currently pursuing a BaaS strategy. While BaaS may not be for every financial institution, this represents steady growth and awareness from previous years.

The Future of Open Banking and Open Finance

Many experts expect the upward trends to continue in the coming years and energize the landscape by enabling conventional players to offer the unconventional. The need to respond to and exceed customer expectations is familiar to financial institutions. But a flexible API-based framework is the best way to account for new developments and meet unique customer needs.

For a more comprehensive look at bankers’ perspectives regarding the industry today and in the future, refer to our latest Banking Priorities Executive Report.

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Shanda Purcell brings more than 25 years of business and product development experience to her role of Sr. Director of Open Banking in the Product Management area. She is currently responsible for working with and leading a team of dynamic and innovative professionals as part of CSI’s Open Banking Initiative, which enables banks and partners to connect their current applications with fintechs and solutions of their choice, helping them stay relevant and competitive in the financial industry.