Open banking will reshape the finance industry as we know it

A CFO South Africa webinar reveals how digital solutions and open banking are changing the finance industry.

Open banking is taking the finance world by storm and is poised to reshape the finance industry as we know it. It operates on the premise that customer information – which includes personal details, financial records and credit scores – belongs to them. As owners of that personal data, they have a right to access and share that information with third-party users in real time when needed.

A report published by Allied Market Research shows that the global open banking market generated $7.29 billion (R104 billion) in 2018 and is expected to reach $43.15 billion (R616 billion) by 2026.

CFO South Africa recently hosted a webinar featuring three major players who’ve been pioneering open banking in South Africa for the past decade. Data aggregation and analytics platform Envestnet’s Yodlee, and personal finance management application 22Seven have been partners in open banking since 2010, while Nedbank has been actively involved in the space since 2019.

Historically, access to their financial information has been a legendary pain point for South Africans. Apply for a loan or sign a rental agreement and you’ll be required to produce stamped bank statements going back three months. Apply for car finance, and the dealer will want to see your financial history in order to gauge if you qualify for funding. As the customer, the onus is on you to secure those documents, either by physically going into the bank or to an ATM, and sometimes, banks charge for this information.

But, in the digital era, there’s a technological solution. Banks and fintech institutions are now adopting software intermediaries that allow applications to securely talk to each other. Application Programming Interfaces (APIs) enable third-party developers to build applications and services around the financial institution, providing greater financial transparency for account holders.

22Seven is one such example: it allows users to import their banking information onto a single platform, through the use of APIs. The personal finance app has at least 1.3 million users in South Africa and uses Yodlee technology to collect data from some 120 institutions.

Users can then track their financial activity from loan repayments, to rental payments, petrol, food and entertainment spending – in real-time. It paints a clear, easy to understand picture of where your money is going and how it is being spent, using colourful data visualisations instead of the usual bank statements.

The aim is to encourage saving and responsible spending. It operates almost like a mobile accountant and uses pop-up messages to alert users when they’re unnecessarily spending and to encourage them to save when possible.

Yodlee head of international Jason O’Shaughnessy told webinar participants that open banking has since morphed into open finance. “In some parts of the world, they don’t call it open banking; they call it open finance, which is about accessing your data,” said Jason.

He explained that when open banking began in Europe and the UK, the technology was mainly used for payments of accounts and credit cards. “All of the other account types, such as mortgages, investments and loans, would be classified now in Europe as open finance, and there’s a debate now about when those account types will be accessible.”

In the world of open finance, however, customers can access a copy of their home loan statements in 30 seconds through their mobile devices instead of contacting the bank telephonically or physically visiting a branch – especially if, for instance, they bank at one institution, but their home loan is lodged another.

Managing director at 22Seven Jikku Joseph said the app development team has been working closely with local financial regulators as a third-party provider. “South Africa typically follows legislation that is taking place across the international pond. The Financial Services Conduct Authority and the South African Reserve Bank, through its payments department, both released papers on open banking in December last year,” explained Jikku. He said there would be a chance for third-party data collectors and providers to give the regulators feedback in July and September. “Ideally, we are looking at implementation at around 2022,” said Jikku.

Nedbank’s head of digital strategy and innovation, Tawanda Chatikobo, said that customer satisfaction is always the prime agenda. “We’re speaking to third parties like Yodlee and 22Seven to understand what the fintech and banking ecosystem looks like, what customer needs are, and getting systems out to meet those needs,” said Tawanda.

But, of course, in the era of big data, questions and uncertainty around ownership and security hinder the growth of open banking. “A positive takeaway from open banking is that it draws a line under who owns the data,” said Jason. “Historically banks will say, this is our data, we own the data, and that is reasonable because they are the custodians of your money, they secure your data, and the last thing they want is someone to get hold of your data and do bad things,” he added.

Open banking has now changed that dynamic and placed ownership of that data in the consumer’s hands, and security of that sensitive information is also the client’s responsibility. “I feel sorry for banks because it’s a double-edged sword. They want to open up and give access to the consumer to improve their financial lives, but on the other hand, they still want to make sure they’re doing the right things with the data,” said Jason.

In addition, Jikku pointed out that 22Seven users question their service providers on public platforms like Twitter if they cannot access certain services because banks are not sharing data. “If the service provider can’t provide access or their site is down, it’s frustrating for the customer,” said Jikku. “The use of social media to amplify that voice and the institution’s inability to service their clients in real-time will pose a threat of reputational damage.”

Tawanda said the benefits of open banking are twofold: “It enhances the client experience and helps us meet customer expectations.” Jason agreed, saying that globally, customer loyalty has increased, with banks opening up and becoming part of financial ecosystems.