COVID-19 led to a disruption in different sectors, and banking is no exception. Nonetheless, with the application of Open Banking in the field, banks have found their way back to stability. The recent waves of digitisation have broadened the scope of significant technological changes in the banking sector.
Be that as it may, well-established banks still need to discover the full potential of Open Banking. One such approach is to monetise the Open Banking platforms.
But before we dive into how banks can monetise these platforms, let us first have our fundamentals brushed up.
What is Open Banking?
Open Banking involves sharing customer data and other vital credentials with third parties by banks and other financial institutions. Third-Party Providers (TPP) require such data to improve users’ financial experiences with products and services.
With increasing technological capability and licencing, TPP can easily access banks through Application Programming Interface (API). However, You should note that the data is only available upon the customer’s explicit approval.
What Good does Open Banking Offer to Customers?
Before the Open Banking Platforms came into the picture, traditional banks were the custodian of all the customer data.
Only the bank authorities could know confidential details, such as the type of account customers own, their financial ability, credit limit, the whereabouts of spending, etc.
However, the emerging digital ecosystem has facilitated the need for personalised financial products for customers, and that’s where TPPs come in. The data fetched from the bank is analysed for a customer’s spending habits and made to offer custom product recommendations.
The data is used in consumer lending to gain insights into customers’ creditworthiness. This not only helps deliver customers faster conversion and approval rates but significantly reduces the operating and administrative costs at the bank’s end.
Furthermore, Open Banking has made way for ‘Buy Now, Pay Later’, enhancing credit offerings to customers and small businesses.
Open Banking- a Bank’s Perspective
Banks encounter a new challenge almost daily in the face of rapid digital transformation. The same software that used to be the sole proprietorship of the bank is now a differentiator between the customer needs and the bank’s internal processes.
This is because, earlier, customers used the interface with the banking services only through the bank’s branch, but now they use the same interface through their smartphones, laptops, voice assistants, etc.
Another major challenge for the banks is to innovate amidst the increasing competition facilitated by Open and Embedded Banking. Embedded banking is a broader term that suggests integrating financial solutions with a business platform through APIs. In contrast, open banking involves sharing customer data with third-party providers.
Since traditional banking services are getting commoditised vigorously, banks must focus on creating a level playing field by generating other revenue streams. Monetizing the Open Banking platform could be one way of revenue generation.
Some Business Models for Monetizing Open Banking through APIs
APIs are the Kickstarter to Open Banking monetisation in the current banking ecosystem. Once the banks can build APIs for public use, they can move on to selecting the most suitable model for monetising API.
Without much ado, let’s learn about such models:
1. Data Model
Banks pursuing a data-based business model must establish a two-way data feed where they receive the data every time a TPP consumes its API. The best way to monetise is to build a paid model where TPP is charged according to the volume and types of data consumed.
2. Transaction Model
This is similar to traditional transactional banking services, except that the TPPs can access and utilise the data through plug-and-play APIs. This model focuses on the APIs completing a transaction like paying the bill or transferring money. Once the transaction is complete, users are charged a fee.
3. Per Call Model
Per Call is one of the most widely used models, which mandates every call as chargeable. Simply put, the TPPs pay each time they use an API.
However, unlike other models, a pre-monetisation setup is required in Per Call Model. Banks must offer a clear value proposition by asking their customers whether they will pay for the service and how much.
4. Subscription Model
This model is streamlined to further two types of costs- fixed and dynamic.
The former is a straightforward pay-once-a-month model offering full access to APIs. While in the dynamic model, TPPs sign up for a fixed number of calls over a period of time and hence, pay for the API in a tiered way.
The cost may increase per tier, but the price per API significantly drops, making it the most preferred choice amongst TPPs. Moreover, TPPs always have the option of upgrading their dynamic subscription to the next tier if they exhaust the permitted number of calls.
More Direct Ways to Generate Revenue from Open Banking
While APIs may be the most favourable way to inject fresh revenue into bank streams, several other methods are available to accomplish the same.
Partnering with Fintechs
Fintechs are changing the competitive landscape of the financial services industry, and banks can make the most of this.
Banks can create a marketplace by collaborating with fintech and offering their products to customers directly.
On the monetisation front, banks can charge a commission or a recurring fee from TPPs to offer their customers a wide range of products and improve customer engagement.
Delivering Marketing Campaigns
Since Open Banking allows data aggregation, banks can use this in their favour by creating a detailed and precise customer profile. This will help banks position the most relevant financial products or services for each customer.
The personalised insights will enhance the quality of marketing campaigns, drive sales and eventually, add to the overall revenue of the banks.
Open Banking has set in motion for banks to move away from their traditional banking systems and adopt cost-effective methods. If used tactfully, Open Banking platforms can provide innumerable ways for banks to monetise areas of their business for more profitable business journeys. The essence lies in analysing the current landscape and devising strategies with wit.
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