Use Cases And Business Opportunities Stemming From Open Banking (4/4)
This is the fourth and final part of our four part Open Banking series written by Aaryaman and Lars. You can find the other parts here: one, two and three.
In the past three blog posts, we have described what is driving open banking, the history of Open Banking, and the current status of Open Banking in different regions. In this fourth and final blog post, we want to put the spotlight on actual use cases of Open Banking: why should entrepreneurs care about this? What are the benefits of open banking for consumers and businesses alike?
Before diving into the use cases, we want to highlight two things. Firstly, the goal of Open Banking is to put the bank account owner in charge. This idea should always be at the center and should be respected by banks and open banking providers. Nobody should have the intention to obtain and use data for things that the data owner did not explicitly agree to. Similarly, the banks should not try to intentionally limit the uses of a person’s data; the banks must securely and diligently respect the data owner’s consent. This is at the center of most Open Banking regulations and can be achieved with the right design and guidelines.
Secondly, it is important to acknowledge that the data in our bank accounts is powerful, but by no means unlimited. All of the use cases we will be highlighting below all more or less use the same data gleaned from bank accounts. This data includes:
- Name(s) of the bank account owner(s)
- Bank account number
- Account balance
- Account transaction history for transactional accounts (such as current accounts, credit cards, loan accounts and more)
- Amount, name, value and other details about securities and stocks in an investment account
It should be noted that banks have access to even more data (e.g. birthday, email, and address of bank account owner) and potentially this could be made available to third parties as well. At the moment this is not the case in most countries and therefore we limit our use cases on the data points mentioned above. But with more data available, more use cases will also be possible. For this reason, India’s Account Aggregator framework – which encompasses things like insurance policies, tax receipts, businesses invoices, and more – will probably be a breeding ground for new use cases around open banking.
While looking at all the different players in the Open Banking world, you realize quickly that the space is already very crowded and Open Banking-powered services are popping up in various different industries. We wanted to highlight use cases in different areas. It would have been an option to separate the use cases into the industries where they are implemented but we did not want to focus on the industries too much. We decided to focus on why Open Banking is the right tool in so many cases. Thus, we split the Open Banking use cases into four categories: two categories on how users can benefit from Open Banking and two categories on how service providers can benefit from Open Banking.
Why do people use Open Banking?
Our bank accounts contain a lot of information about ourselves, including our personal details and spending behavior. This data is often required in other third party services, but without Open Banking these service providers have to ask their users to enter the details manually. Especially in today’s world of low attention spans, this manual onboarding process creates a huge burden for the user and causes high drop off rates.
This brings us to our first example of “Avanza”. Avanza is a Swedish stockbroker and onboarding has been a tricky part of their user journey. Before using Open Banking, users from Avanza had to manually enter their investment account number (Source). Most users did not know these details by heart and had to go through paper documents or a separate online portal to find these details and finish the signup process with Avanza. While using Open Banking, the user can now login into their old account, Avanza then displays the available accounts behind that login and the user can choose with which account he/she would like to proceed. Therefore, the user does not have to leave the service and can finish the whole process in just a few minutes. It is somehow funny, that entering a simple account number was one of the biggest burdens during the Avanza signup process but I am sure all of us have at least once abandoned a signup process because relevant data was missing. In the Avanza case it was the account number but there is a lot more – also for our transaction history.
In Germany, contract optimization is very popular as the typical binding period for most contracts is one or two years. This means when you sign up for a new phone, internet, water, gas, electricity or insurance product you usually have a fixed period. If you don’t cancel the contract it renews for another year until cancellation. However, many companies offer special offers if you switch to them, and therefore, in some areas it is quite popular to change providers whenever the binding period is expiring. Doing this once might be easy, but keeping consistently an eye on existing contracts and expiration dates is cumbersome. For that reason, many providers are offering contract management as a feature. Some examples are Finanzguru or Check24. But the onboarding process is crucial and many people do not remember all their contracts especially when the providers only charge on a yearly basis. Without Open Banking, the user has to go through his/her paper documents or emails and find all providers. Thanks to Open Banking, this can be detected automatically through identifying recurring payments and categorising them.
While the providers above use Open Banking to detect contracts to cancel them, there are also other companies using Open Banking to detect and transfer contracts. This is specifically interesting for banks as onboarding is a challenge for them as well. When a new customer finishes the sign up process for a new current account, he/she has to start using the account which might necessitate transfering money to the account but also informing the employer and other parties about the new bank account. This can be a hassle. Therefore, providers like FinLeap Connect or fino in Germany and ClickSwitch in the United States are offering „bank account switching as a service” to banks. After finishing the account opening process, the new bank account owner can log into his/her old bank account and the mentioned providers recognize all recurring payments that might be worth transferring to the account. After selecting the relevant payments, these providers use different channels to inform the payment partners about the new bank account. This enables the account owner to get started quickly and save time since they do not have to identify the payment partners themselves.
Lastly, business owners and freelancers can also have convenience benefits while using Open Banking powered products. One of the most common use cases is open invoice matching. Nowadays, SMEs and freelancers can choose from various service providers that help them with accounting and invoicing features. Creating and sending the invoice are very helpful tools, however, without Open Banking the creator of the invoice is required to manually check their bank account if an open invoice has been paid. This might be an easy task if it is only 1-2 invoices per month, but with a higher amount of invoices this can become quite cumbersome. Providers such as Debitoor or Accountable let their users connect their bank account and inform them when an invoice has been paid. Additionally, the automatic sending of payment reminders is an usual feature as well.
B) Data Driven products
In the previous category we explored how consumers can make their life more convenient through Open Banking. All service providers could provide their core service even without Open Banking, the services would just be more complicated to use. On the other hand, the service provider in this category would not be able to offer the service in the way they are offering it without using open banking. The bank account data in these cases is being used to create completely new products.
The first one is Tink, one of the biggest account aggregators in Europe. We have seen Tink already as an account aggregator behind Avanza; however, Tink is also offering a PFM (Personal Finance Management) service in Europe. Many of the first Open Banking use cases around the world were around PFM. The aggregation of all bank accounts into one frontend provides a better overview and easier tracking for consumers. However, a simple PFM would probably be rather in the category of “convenience“ as it makes it easier for consumers to check all their bank accounts in one app. But the Tink PFM is an example of a data driven product, as PFM has evolved from a pure aggregation product to a financial advisor. In the example of Tink, the service analyzes spending and income on all connected bank accounts and provides actionable insights for the user. This starts typically with budgeting but goes also further into understanding how much income the user has left over at the end of the month, where he/she is double spending for the same service and what unusual high expenses should be reviewed. While this is a service that any bank can offer on top of their own bank account, only with Open Banking technology will it be possible for users to easily get visibility into all of their financial accounts in one place.
Saving money can be hard for many people. One reason of many is that the topic of saving can be quite dry and very hard to approach: How much should I save? Where do I put my savings? How do I avoid just tapping into these funds? In the last years of Open Banking we have seen several services that offer data driven products to consumers to help them save money. We want to highlight Digit and Mylo as representatives for their area. Firstly, Digit is a tool to help people decide their exact savings amount. Although this may sound strange at the beginning, deciding the right amount to save each month is a often very hard question to answer and perhaps in many cases it is the actual reason that a consumer is not saving at all. Digit is telling their users that they do not have to make the decision themselves but the app will help them with that. The user connects his/her bank account and Digit analyses their income and expenses. Based on that Open Banking data, Digit will make a prediction of how much the user can save each month. The user can always adjust this, get money back into his/her bank account, and train the Digit algorithm so that the savings rate should be lower. Secondly, Mylo is a representative from the “round up tools” category. Users connect their bank account to Mylo and the app will save money for them as well. However, Mylo does not calculate the right savings amount as Digit does, but rounds up every transaction and saves that money. Therefore, a coffee for $2.75 can result in an automatic $0.25 saving. This might not sound like a lot, but users with high transaction volumes have reported that round-ups have helped them save unexpectedly large amounts of money over the course of a few months.
Additionally, transaction data is also quite commonly used for loyalty and rewards systems. Remember when you had to carry an additional card for each store to collect points and get rewards? Guess what. Most of our shopping data is in our bank account and can be easily plugged into various different services. One provider we would like to highlight is Drop. Drop is powered by Plaid (Details) and uses transaction data to provide rewards to their users based on their purchases. Brands are always looking for different ways to promote their products and companies like Drop are a perfect fit for them. Since users connect their bank account to Drop, the app knows exactly what you purchase and Drop can enable brands to specifically target certain customer groups. This could be based on age or, location but it is probably especially interesting to focus on past purchase behaviour: A brand could target users that currently shop with a competitor or users that have purchased something from their own brand some time ago but did not return.
Not only consumers, but SMEs too can benefit from data driven products. One of the areas for these services is cash flow analysis and optimization tools such as Agicap in France or Finux in Germany. These providers are comparable to the PFMs we have discussed before on the consumer side. Cash flow optimisation services are using the access to the bank account of the SME to provide insights and support with crucial decisions. There were many services out there before that supported SMEs with accounting and similar services. And they will still be used, however, especially for smaller companies cash management is important. Studies show that many smaller companies fail not because they don‘t earn money but they have not been able to secure sufficient cash flow to cover certain expenses.
We believe that the number of data driven products will increase over the coming years around the world. Many other industries have similar advantages to those we have highlighted here. We have now seen and discussed the main two reasons why consumers are using Open Banking services and want to turn our focus now on the service provider side. The provider of open banking services clearly have the goal to offer services that their customers like to use, and thus, the two consumer reasons might already be reason enough for some players to offer Open Banking products. Nevertheless, we have discovered two other reasons that are additional motivations for service providers to offer Open Banking products.
Why do service providers offer Open Banking products?
C) Risk Management
When we talk to people about the opportunities stemming from Open Banking, risk management is usually a topic which comes up. As risk management is tightly connected to the “convenience” benefit of consumers mentioned before, it is worth diving into in a deeper way.
One kind of risk management deals with properly identifying the user and ensuring that correct account details have been recorded. A typical use case in Germany for example is around direct debit payments. Direct debit is a vastly popular payment method as the payer only needs to provide his/her name, account number (IBAN) and consent to the transaction. That is super convenient for the payer, however, for the payee it is a risk for two reasons. Firstly, the payer could have entered an account number from somebody else since it is quite easy to obtain correct account numbers. Secondly, even if the account belongs actually to the payer, the payee does not know if the account balance is sufficient. If the balance is insufficient the direct debit will bounce and additional efforts have to be undertaken to receive the payments. Therefore, providers have started to offer direct debit payments only when the payer is logging into his/her bank account, and thus, the payee can verify the account ownership and balance. This is being used in e-commerce shopping but also in other Fintech services that rely on direct debit to move funds. Two Fintech mega players are making use of Open Banking for this: PayPal and Klarna. Paypal is likely to use Open Banking technology via Tink to access their users bank accounts and debit cards for this risk management (Source). And Swedish Fintech unicorn Klarna is using their own technology for risk management in Germany in regards to their Klarna Card. Klarna is taking any amount being spent with the debit card from their customers main account via direct debit, and in order to ensure that the right account with sufficient balance is connected Open Banking comes to the rescue.
These examples are something we would call “risk management light” as mostly bank account owner, number or debit card details are being transferred. But there is a whole big other opportunity for risk management: Scoring of the customer. The bank account does not only provide details about the ownership and balance but also our income and spending history. And the income and spending history is one of the most important criteria for lending companies. There are many examples from around the world including Lending Club in the United States or Auxmoney in Germany. These providers use bank account access to
- Verify Identity
- Calculate salary and other income
- Identify Negative spendings such as gambling, bounced payments, debt collector and more
- Identify other loan payments
- Calculate regular income and expenses
This data will then be used for the risk management process of the lending product. Without Open Banking the service provider would have requested the user to submit their data in paper or PDF format. While the Open Banking integration is a convenience benefit for the user, the service provider is likely to have additional risk management benefits as more can be accessed. Firstly, the amount of data in a bank account is likely exceeding a couple of PDF statements as a longer history will be provided with the same effort – connecting the bank account. Secondly, the depth of data can be analysed better as well. For example, there are some lenders that analyse ATM transactions from their loan applicants and with the ATM number provided in the account they could verify the location of the ATM. Loan applicants with withdrawals from ATMs based in Casinos were subsequently rated lower for the loan application. While this analysis is easy to build on top of Open Banking data, the same functionality for a paper or PDF process is not impossible to build but likely too error-prone.
Utilizing Open Banking data for loan applications is a big trend in the industry. Very likely that we will see a similar trend in India as well. While the providers mentioned so far turned a paper or PDF process into a fully digital process, we also want to highlight a provider that takes this approach to rethink a whole industry. The startup is called Credit Kudos and the industry they are going after is credit bureaus. Incumbent credit bureaus have built their credit score often on different data sources that tend to rely on the past. However, bank accounts usually contain an up-to-date picture of our financial data and Credit Kudos is tapping into that market. Combining open banking data with other data sources could be a powerful tool to reinvent the industry of credit bureaus.
There is an obvious second reason for service providers to offer Open Banking powered use cases: increase of sales.
In many European countries “account aggregation” has become a standard offering by banks. This describes the feature that the user can access all of his/her bank accounts in the frontend of one specific bank. In the early age of Open Banking, this was provided by startups and the best known example is likely Mint from the United States. In the last few years, many banks took Mint’s example and are using Open Banking technology to connect to other banks. Users have the big advantage of not having to access multiple apps to see their account balance and transaction history but get the same data with one app. This feature alone is enough for many banks to offer account aggregation. Additionally, the bank benefits from access to a lot more data that can be used for various matters, most important for better addressing the needs of their clients which includes selling additional products. In Germany there is Deutsche Bank that has launched an account aggregation product a few years ago (but which was struggling recently due to the negative impact of PSD2 API implementation) as well as Erste Bank (Austria), ABN Amro (the Netherlands) and challenger banks like Revolut (account aggregation currently only in selected countries) as well. Being able to access this kind of data enables the banks to do various things. Firstly, the bank can understand what kind of products their users are having from competitors. While this might not be helpful on an individual basis, the bank can learn from their whole customer base what products from competitors are popular and might be worth adding to their own offering. Secondly, the bank can also use this data on individual customer levels. There have been stories about some banks that have highlighted internally “asset under information” numbers which is the aggregated account balances users have connected to their frontend. Especially while advising clients with their investments, it is extremely important to take existing investment products in consideration. Therefore, aggregating all financial products into the bank app, enables that very bank to perform better investment advice than other players without that in-depth knowledge as it might rely on inaccurate details from the account owner.
In addition to banks, other service providers can benefit in a similar way. For example independent investment advisors that consult their customers on investment decisions always need to have an overview of existing investment products from their clients. These companies are using Open Banking as well to aggregate data from their client for this consultation process.
“We need Banking, not Banks” is a powerful quote attributed to Bill Gates. We believe the world will always need banks but as you have seen in the examples above, our banking activities move into a certain context. This is often described as embedded finance or contextual banking. In order to power such services, banks and other players need to offer API access to data and functionality so third parties can build these new services. Incumbent providers with big customer numbers such as banks often fear that they might lose control, customers and income when they open up their infrastructure. Especially in a country like India with a growing market, this could be a win-win for banks and new players. Nevertheless, it is still a long way to go. We invite every stakeholder of the industry to join this path and empower (or build) the services of tomorrow.
This concludes the last and final blog post of our four part blog post series about Open Banking with a focus on the Indian market. We hope you enjoyed it and please get in touch with us if you are interested to learn more or share your experience.
This series consists of four parts:
Part 1: Data Empowerment, Data Protection, And The Need For Open Banking
Part 2: How Did Open Banking Come About And How Does It Work?
Part 3: How Is Open Banking Being Implemented Around The World?
Part 4: Use Cases And Business Opportunities Stemming From Open Banking
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