According to the World Economic Forum (WEF), more than half of the world’s population today is below 30. Despite that, there is a growing divide between banks and the younger generation.
More than 45 per cent of respondents to WEF’s Global Shapers survey disagreed with the statement that they trusted banks to be fair and honest.
Amidst this distrust, how can banks regain the trust of the next generation of consumers?
The answer lies in how they approach storing the financial data of their customers. Hampered by the need to adhere to strict regulations regarding the exchange of such data, banks previously chose to store them in silos.
However, times have changed.
Powered by an open ecosystem where APIs facilitated the exchange of digital financial data across platforms, new-age fintech companies are now able to offer better financial products for their customers.
Users duly responded to a more convenient and personalised experience by switching to the services of these disruptors.
Change in perception
Having witnessed the success these companies derived from an open API platform, banks in Europe and North America soon took a page out of their playbook and decided to embrace it.
The move saw banks unlock their vaults of consumer financial data.
With an open ecosystem where banks could freely exchange information such as transaction and income history with one another, they began to see the advantages - they were understanding their customers better.
With the relative success of Open Banking in the West, regulators within Southeast Asia started to follow suit.
The Indonesian financial services authority / Otoritas Jasa Keuangan (OJK) released an open API framework detailing the rollout of a common API gateway for banks and other financial institutions to exchange financial data.
Collaborate to win
Amidst the talk about open APIs and the Open Banking ecosystem, what tangible benefits does it bring for banks?
Firstly, a more engaging experience to satisfy the notoriously short attention span of younger consumers.
For instance, with APIs instantly extracting consumer data from different financial platforms, banks can verify the identity and financial history of their potential customer within seconds.
This allows for the pre-filling of registration forms, slashing the time needed to onboard a customer.
Besides, banks can streamline their loan approval process and offer loans faster, without compromising on default rates.
This is a result of APIs being able to aggregate financial data from different platforms.
With these data, banks are able to generate a comprehensive credit score for individual borrowers, allowing them to accurately determine their ability to repay.
Apart from offering a better experience for customers and lowering the default rates on loans, open APIs also pave the way for the creation of new revenue streams.
Banks can leverage the increased knowledge of their customers to offer new services as part of upselling or cross-selling efforts.
For example, a customer who took out a property mortgage could be offered a property insurance plan at a competitive premium specific to his income and credit history.
This was possible because open APIs allowed the bank to verify their income and credit history across different platforms before generating a risk-adjusted premium.
Beat the competition
On average, it takes several weeks for a personal loan to be fully processed by banks. In the same period of time, one can easily get approval for a loan at an alternative lending platform.
This has forced banks to rethink how they approach the approval of loans.
Previously, they wasted valuable time and resources retrieving physical financial documents (such as past income statements) from customers and searching the web for their credit report.
However, with an Open Banking ecosystem, banks can easily access the necessary information through a shared API gateway, allowing them to approve loans within minutes.
Amidst the numerous benefits open APIs can provide for banks, what effect does it have on the bottom line?
A report by Accenture has found that banks that embrace Open Banking will profit from a potential revenue uplift of 20 per cent.
Whereas those failing to do so risk losing 30 per cent to disruptive industry players such as fintech companies by 2020.
It is no secret that fintech companies are revolutionising the future of financial services, providing easy-to-use and personalised products at a fraction of those offered by incumbents.
The enabler of their success? Open APIs.
Banks and innovation do not typically complement each other. For these century-old institutions, the choice to adopt new technologies at the expense of legacy ones can be difficult.
However, it is no longer a choice. The mantra of “innovate or die” represents the harsh reality of the financial services sector today. Banks, like everyone else, will be forced to innovate.
Finantier works with the leading banks in Indonesia to provide custom-built APIs for them.
By connecting them to the Open Finance ecosystem, we enable them to gain an edge over their competitors who still operate in silos.
If you’re an Indonesian bank looking to leverage the open API framework set out by OJK, speak to us today to find out how we can work together to develop the next generation of financial services.