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Open Banking’s Five Key Challenges to Financial Institutions (Part One of a Two-Part Series)


Open banking promises financial institutions a way to expand their portfolios and customer reach without having to replicate service offerings already available in the market. However, data security and privacy fears, communications shortcomings, fintech first-mover advantage, and complex legacy systems integration issues are creating tough obstacles for traditional banks to overcome.

The new world of open banking, in which financial institutions offer new digital banking and financial services by tapping third-party application programming interfaces (APIs), promises banks and financial institutions a way to gain entry into a widening ecosystem powered primarily by tech-savvy non-banks.  However, plugging and playing in this new digital world is proving easier said than done.

Globally, across all regions, a majority of banks view open banking as an opportunity rather than a threat. In addition, banks in Europe (75%), North America (53%) and Asia (51%) also view open banking as a critical lever to help in their digital transformation (see Figure 1).

Figure 1

However, a sizeable gap exists between desire and reality. In the U.S., only a few large banks and small banks have made inroads while providers’ open offerings are limited to mere screen scraping of customer data of other banks. In the U.K. where open banking is being led by regulatory push, leading banks have been given deadline extensions to embrace open banking. In Asia, adoption levels are marginal despite the absence of regulatory push.

Five Challenges of Open Banking

So, what are banks to do? Customer behavior aside, they first need to effectively deal with their own set of challenges to be successful in the emerging open banking arena. Here are five challenges, for starters:

Deep customer apathy.

The prerequisite for open banking is participation by customers who voluntarily agree to allow access to their data. It’s vital for open banking to take off. However, open banking aspirations appear to have fallen on deaf ears — on an average only 26% of customers globally favor adopting open banking; this percentage is much higher in emerging markets.

This reluctance appears to stem from two reasons. First and foremost is concern over data security and privacy. Concerns over data security loom large over open banking, inhibiting customer adoption. Studies show that data security concerns and fear of fraud also top the reasons inhibiting adoption (see Figures 2 and 3). Second is their demand for value. Studies show a majority of consumers are hesitant to engage in open banking because they have yet to see evidence of tangible value in exchange for their trust.

Figure 2

Figure 3

A lack of customer awareness.

As with any significant change, open banking requires massive education to familiarize customers with the concept and generate buy in. Customer apathy may well result from banks’ failure to effectively communicate and educate customers about the changes to banking terms and conditions that precede open banking.

Better entrenched competition.

As banks navigate their way to the digital era, they are confronted by several non-bank forces such as fintechs, new pure-digital entities, large non-banks such as Amazon and technology vendors. Each of these have begun rewriting the rules of the banking game and are creating a new banking ecosystem, challenging banks to respond. Globally, investments in fintechs are rising rapidly. From under $2 billion in 2010, they are expected to reach $150 billion between 2019 and 2021, indicating the market’s confidence in the ability of these agents to herald a change.

Tech-savvy non-bank competitors are luring customers by offering unbundled financial services via innovative, engaging and empowering tools. Banks that don’t meet this threat head-on face the prospect of eroded market share, increased customer churn, pressure on margins, and last but not the least concerns of information security and privacy.

Data sharing anxiety.  

Open banking relies on data sharing. This marks a paradigm shift for banks. Their difficulties range from the prospect of losing control over customer data and product cannibalization that might result. Banks appear to be struggling with how much customer data they can subject to exposure in order to participate meaningfully in the open banking ecosystem.

Legacy systems constraints.

Traditionally, departmental structures, product-centricity and compliance goals have influenced the rollout of core banking systems. Such legacy systems have become complex over time and are preventing effective interoperability with open banking APIs. The critical shift to customer-centric systems and agility enables banks to overcome the limitations of siloed legacy systems.

The Road Ahead

In part 2 of this series, we suggest seven ways that financial institutions can successfully embrace and benefit from open banking. On the strategic front, a clear positioning strategy and a holistic approach to deal with competition are the critical first steps. A strong focus on building innovative offerings, creating robustly secure APIs and adopting an API-led modernization solution to effectively address legacy systems challenge will help financial institutions ready themselves to plug and play in open banking ecosystems.

Ultimately, open banking survives and thrives on customer buy-in and participation. Thus, customer education becomes vital. Financial institutions must work with industry stakeholders to embrace emerging interoperability standards — a prerequisite to lay the foundation on which the edifice of open banking rests.

This article was written by Amit Anand, an AVP of Consulting in Cognizant’s Banking & Financial Services Practice.

To learn more, read our white paper “Why Banks Must Become Smart Aggregators in the Financial Services Digital Ecosystem,”  view our related Perspectives article "Future Finance: Why Banks Must Become Money Orchestrators,"  visit the Banking & Financial Services section of our website, or contact us.

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Open Banking’s Five Key Challenges to Financial Institutions (Part One of a Two-Part Series)