Open banking has gained immense attention globally in the wake of intense competition in the commercial lending marketplace. Through the use of APIs and microservices, open banking has disrupted the usual ways of running the lending business. It's absolutely necessary for the traditional banks to embrace open banking to be able to stand against the stiff competition they are facing from the new-gen fintech.
Over the last couple of years, there has been significant growth in commercial lending opportunities created by new technology & digital tools. Banks now face intense competition from Fintech companies, which are attracting small business owners in granting loans much faster. The increase in alternate online lenders who are adopting non-traditional ways of credit scoring to attract small to medium business owners have also impacted the commercial loan segment in moving away from complex credit-seeking.
We're also seeing a steady rise in the number of Neobanks - digital-only banks, not burdened by the costs of maintaining extensive networks of physical branches and passing on the benefit to the customers. With the combination of technology and data science, Neobanks are disrupting corporate lending and shifting the game to the next level. There is a need for traditional banks to accelerate innovation and take new products and services to market quickly and cost-effectively to regain some of the market share they have lost over recent years. The question is, how?
APIfication will drive the metamorphosis in banking
Open banking is emerging as a promising theme supporting the transformation the banking industry needs to undergo. It refers to a scenario where banks expose their data and internal processes to third-parties via secure application program interfaces (APIs). Further, banks are looking to replace monolithic applications with a flexible microservices architecture. Each microservice acts as an independent functionality, can be developed in any programming language and delivered in agile lifecycles. The decoupling also allows for continuous improvement and deployment using DevOps principles, resulting in automation across the software development lifecycle.
Various microservices come together to deliver a complex functionality. However, if one of the services fails, it would not lead to application outages. Instead, in most cases, an older and still viable version of that microservice will take over, preventing unprecedented downtime. That has significant business value for a bank, considering business continuity is paramount to minimize financial and reputational risk.
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Specifically in the commercial lending space, open banking is positioned to revolutionize how businesses seek loans. Open banking would imply that transaction data from a customer’s bank can be shared with lending third-parties through Account Information Service Providers (AISPs). New-age or alternative lenders are increasingly using transaction history of customers to feed into credit models and provide loans in a quick and convenient manner. Banks are custodians of most customers’ historical data and without open banking, those lenders would not be able to effectively ascertain the credit-worthiness of borrowers. Moreover, API-driven processes can deliver significant efficiencies across KYC and AML processes as pre-verified information from banks can be accessed through open banking.
Navigating the road ahead
For tradition players in the banking space, open banking presents an opportunity to explore digital-first business models that enable them to use the internet as a tools for boosting top line growth. More specifically, sell their products and services through third-party platforms and sites, alongside direct channels.
On the innovation front, by transitioning their internal processes to a microservices architecture and externalizing those microservices, banks can enable third-party developers to build on top of them to fast-track innovation. That can be done by building an external platform or ‘sandbox’ that comes equipped with a software development kit to enable developers. Overall, open banking will bring new talent to the ecosystem, reduce the cost of innovation, and ultimately, help banks to engage new and existing customers better and build a sustainable competitive edge. They will also be able to reduce cost to serve and improve customer satisfaction, resulting in greater profitability.
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With the proliferation of fintech companies and alternative lenders, it has become increasingly clear that incumbent banks and new-age players will have to coexist. And open banking makes that proposition far more plausible. For instance, Amazon is providing working capital loans to qualified sellers for growing their business on the ecommerce platform.
While banks can harness the technological innovations brought about by fintechs, the fintech companies can leverage rich, historical customer data available with banks and access a larger pool of customers. Bank-fintech partnerships will become more common as banks enter the next decade of ultra-digitization. We are already seeing prominent commercial lenders forging those partnerships to drive significant business outcomes. Lloyds Bank Commercial Banking has partnered with Xelix which uses machine learning to enhance validation and decision-making processes within a business’ accounts payable.