Disruptive forces, including neobanks and evolving consumer and corporate expectations, are challenging a banking status quo that has existed for decades. Those changes, though, present opportunities for all financial institutions by unleashing the potential for innovation.
In such a radically changing environment, one of the most promising new opportunities for community financial institutions is open banking. It's the secure, real-time sharing of financial data between systems that enables customers to access their data and conduct financial transactions when, where and how they want.
Open banking offers community banks opportunities to deliver compelling experiences, engage with new customers through novel channels, grow relationships with existing customers and generate additional sources of revenue. When it comes to open banking, a financial institution's agility matters more than its size.
Delivering a Better Customer Experience
Digital interaction is now nearly ubiquitous. It's how people consume information, communicate with one another and conduct business. People expect a digital experience that is effortless and personalized, and open banking can help financial institutions satisfy those expectations.
Open banking can take many forms. It may involve partnering with Fintechs to transform the bank's digital channels to deliver complementary services that make customers' lives easier. For example, partnerships could enable financial institutions to offer credit monitoring-and-improvement services to retail customers, payroll services to small businesses or trade finance options to corporate entities.
Community banks can extend the value they provide even further by partnering with Fintechs to deliver financial services through channels customers access in their everyday lives or in the course of conducting their business. That open banking strategy can enable community banks to enhance and grow customer relationships.
Customers could, for instance, access information about their health savings account balances in their local pharmacy's app rather than at the bank's website. In specific industries, such as property management, software programs could access account data directly from the bank so those companies could more easily manage homeowners associations' financial transactions.
When it comes to open banking, a financial institution's agility matters more than its size.
Open banking can make it easier to turn data into insights, and those insights can be leveraged to personalize financial services for customers.
Think about all the data that moves through a community bank's systems. In much the same way community banks control the flow of funds, partnerships with Fintechs and third parties can give banks control of the data flow. A Fintech partner, for instance, can apply artificial intelligence to the data to help a commercial customer manage cash flow more effectively or help a retail customer save for a new home.
That's delivering real, meaningful value to customers. It reinforces the high-touch, customer-centric service many community banks pride themselves on delivering.
Tapping Into a Larger Talent Pool
There's fierce competition for tech talent in financial services. Even if a community bank has the capital, it might not be able to recruit the talent required to achieve a technological transformation.
But the right open banking strategy can enable banks to create mutually beneficial partnerships with software firms and use their talent. Tech firms contribute innovative, differentiated, user-centric perspectives to banking use cases, while bankers bring regulatory expertise, deep customer relationships and a wealth of industry knowledge.
Open banking also can enhance existing partnerships. Many banks rely on their core technology provider for technological innovation. Forward-looking providers are meeting that expectation by creating open banking ecosystems that enable clients to leverage third-party innovations. Those kinds of partnerships can give community banks an edge in the competitive financial services industry.
Finding New Sources of Deposits and Income
Competition for deposits can be difficult for community banks, which are vying against their larger counterparts and challengers such as Chime and Varo.
Open banking can offer an edge, enabling community banks to partner with Fintechs and generate revenue more efficiently. For instance, originating deposits through a Fintech can cost less than originating deposits through a branch.
By becoming the bank behind the Fintech, community banks can grow their deposits while adding revenue share from the Fintech as a source of noninterest income. They also can leverage those partnerships to serve niche markets that extend beyond the geographical boundaries of the branch. And by developing specialized products that cater to particular industries or institutions, a community bank could pursue entirely new markets.
With open banking, community banks can accomplish many of the same functions for customers, only faster and better.
Leveraging Consumer Trust in Financial Institutions
Consumers may enjoy the convenience and experience offered by Fintech apps, but they also often want the security of an established financial institution.
That trust can make banks attractive partners to Fintechs. For some consumers, accessing a novel service through their bank is more acceptable than accessing it directly from a Fintech site.
Those partnerships through open banking could continue to position banks as trusted repositories of customers' personal data. That data could then be accessed by approved service providers in other industries through open-data agreements, driving value for customers and growth for the bank.
Embracing the Cultural Shift
Open banking is not just a matter of technology, which simply enables open banking. Community banks can truly realize its benefits by being open to new ways of thinking about data sharing and service delivery. That requires vision and often a cultural shift within the bank.
With open banking, community banks can accomplish many of the same functions for customers, only faster and better. And they can extend the value of those traditional services by adding complementary offerings and reaching customers through new channels.
Community banks don't need to become Fintechs. Open banking, properly facilitated by the right technology partner, can make community banks more efficient, more competitive and better equipped to thrive in an era of radical change.