How Open Banking APIs are Revolutionizing the Australian Financial Services Industry

Banking and financial services are the initial sectors to be affected by the enforcement of Consumer Data Rights (CDR) regulations.

Thus, Australian incumbent banks must take advantage of this circumstance by embracing Open Banking APIs as a chance to use existing strategies for meeting client needs for convenience and personalisation. By enabling consumers to exchange their financial data safely and facilitating the switch between service providers, this approach has completely changed the way Australians engage with their finances.

In this article, let’s figure out the influence of open banking APIs and their experiments in the real world.

What is an Open Banking API?

Source: Financial Technology Association

With open banking, customers can now authorise the sharing of their data with other financial institutions or trusted third-party providers, through open-source Application Programming Interfaces (APIs). This technology acts as a bridge between different systems, allowing for seamless communication and data transfer.

The financial information can range from transaction history and account balances to credit scores and loan applications. By allowing banks and third-party providers to access and analyse their financial data, customers can benefit from better personal finance management (PFM) systems, personalised recommendations, and simplified access to credit.

Open banking services have cultivated competition in the BFSI sector – forcing incumbents to either innovate their financial services or partner with fintech.

How Open Banking API Works?

• What the banks do

Following the adoption of the Payment Services Directive (PSD2), banks are now required to exchange consumer data. This means that their consumers’ data should be accessible through an API, which a licenced third party may subsequently use.

An interesting fact is that in Australia, the big four banks are all Open Banking compliant.

• How businesses get registered

For companies that wish to directly access customers’ financial data, they will need to get an Account Information Service Provider (AISP) or Payment Initiation Service Provider (PISP) license. Once authorised, the third-party provider can utilise Open Banking APIs to access the customer's financial information. 

• What the customer sees

By giving consent to third parties to access and use their financial data, users can experience more convenient and personalised services. For instance, when a customer initiates a payment through a third-party app, the payment is transmitted directly to the bank using open banking APIs, eliminating the need for intermediaries and reducing the time and costs of payment processing.  

The Impact of Open Banking on Traditional Banking Institutions

Traditional financial institutions in Australia have been impacted by the introduction of open banking. Customers now have more options than ever, thanks to the growth of fintech businesses and the use of open banking APIs. Therefore, incumbent banks have been compelled to adapt and change as a result of the rising competition in order to maintain their clientele.

Banks have traditionally had a monopoly on the data generated by their users' financial activities. Many banks have invested in improving their online and mobile banking services, including the focus on innovative banking app features and functionalities to rival those offered by emerging fintech businesses. 

While incumbent banks and financial institutions may face challenges in adapting to the changing landscape, the open banking approach also provides opportunities for them to innovate and expand their offerings. 

Benefits of Open Banking 

In an extended sense, open banking creates new opportunities for all parties involved and benefits everyone associated with it.

1. Open Banking Benefits for Banks and Financial Institutions

• Bank and fintech collaboration

To remain pertinent in the rapidly evolving realm of finance, banks and financial institutions can partner with fintech enterprises to enrich the financial services offerings. Moreover, by exchanging data with fintech companies, banks can multiply their potential to keep up with technology trends that are much more attractive to the common user and leverage innovative infrastructures established by these businesses.  

• Effective anti-money laundering (AML) investigation process

Access to open banking data allows banks and financial institutions to access real-time financial data, enabling quicker analysis and facilitating the identification of suspicious transactions or patterns. 

In real cases, this system helps them fulfil AML requirements by utilising APIs to compare the information a customer has already provided against real-time account and transaction data directly from their bank. 

• More customer-centric experiences

Giving customers effortless and extended access to data marks a significant change for Australian banks. Open banking allows legacy financial institutions to leverage their existing user database to improve their services and deliver personalised financial recommendations. 

This system also simplifies the electronic know-your-customer (e-KYC) process, as banks can easily access their user data for 90 days to verify customer information and account details.

2. Open Banking Benefits for Organisations

• New sources of financing

Open banking payment API helps businesses lower their service charges by providing alternative payment methods beyond card payments.

It also offers a playground for more payment service providers (PSP) to join the market and offer services at competitive rates. Thus, businesses can access a broad spectrum of effective payment gateways such as eWay, ANZ eGate, Square, etc. 

• Higher conversion rates

Open banking APIs also contribute to higher conversion rates for firms by streamlining and expediting the payment process. For instance, with over 60,000 users worldwide, Axi Trading platform recorded $2.5 trillion trades in 2020. To provide lightning-fast e-FX services and a seamless trading experience, the company has decided to integrate more PSPs. With the help of KMS Solutions, the company can meet the demands of its growing user base and improve the conversion rates in the system.

Read the full case study: How KMS Solutions helped Axi trading corporation deploy 9 PSPs successfully within only nine months!

• Easier access to loans

This technology simplifies the credit risk evaluation processes for businesses while still maintaining accuracy. Open banking facilitates easier access to loans by granting lenders direct access to an applicant's financial data through secure APIs. This enables lenders to make more informed lending decisions based on real-time and comprehensive financial information. 

3. Open Banking Benefits for Customers

• Control over financial data

Open banking regulation was designed with the goal of giving customers complete authority over their financial data. For instance, modern APIs are utilised to ensure that your login details and passwords are only accessible to you. 

Moreover, customers have full control over who can access their banking information and can determine the degree of access, ensuring that only relevant information is at the third party’s disposal. This also helps customers increase data security and privacy. 

• Smarter personal finance management

One of the notable advantages of open banking is the power it provides individuals to manage their finances more effectively. Through open banking APIs, users can conveniently retrieve and consolidate their financial data from different accounts and institutions within a unified platform.

This allows for a comprehensive perspective of their financial health, enabling better budgeting, expense monitoring, and tailored financial advice.

• Convenient and personalised services

While traditional banks only provide a set of pre-defined financial services and require users to visit branches or upload transaction files manually, open banking simplifies this process and helps customers save time. Furthermore, it also creates a competitive environment among companies to ensure their customers meet the best standards.

Key Players in the Australian Financial Technology Sector

The Australian financial technology sector has witnessed significant growth in recent years, with several key players emerging as leaders in the field of open banking. These players include both established banks and innovative fintech startups. There are several banks that are already experimenting with open banking APIs, including:

• Utilising internal APIs to enhance an organisation's agility and efficiency: The National Australia Bank (NAB) streamlined its internal APIs through a unified platform, allowing internal developer teams to independently publish or utilise APIs without central team involvement.

• Business-to-business (B2B) APIs for partners and collaborations beyond the bank: Westpac’s bank account and card payment platform called “QuickStream”  has a host of B2B APIs - comprising APIs for payments, card and customer information, business account data segregation - to enable deep integration with partners. 

• Open APIs to broaden the market reach through innovation: Macquarie Bank's devExchange open APIs platform offers account, transaction, and balance, enabling customers to share their banking data with third-party entities without providing log-in credentials.

While incumbent banks experiment with APIs, Fintech companies concentrate on creating unique or creative value propositions and addressing particular banking and consumer challenges via extensive collaboration, using B2B APIs or open APIs to:

• Providing hyper-personalised experience: Up, a digital bank that operates under Bendigo and Adelaide Bank’s ADI (authorised deposit-taking institution), leverages open banking APIs to offer customers real-time transaction information, automated categorisation of expenses, and personalised spending insights.

• Enable responsible lending:  Basiq, a financial aggregation business, developed its open banking platform, categorising its APIs as data services. It offers affordability APIs, which provide banks with a more realistic picture of a customer's financial situation throughout the loan application process.

• Simplifying access to cheaper services: Up leverages TransferWise's API to allow customers to make low-cost international transfers straightforward from their transaction accounts without leaving Up's app.

Conclusion

Open banking APIs have emerged as a game-changer in the Australian financial technology sector. By enabling customers to securely share their financial data with third-party providers, open banking has revolutionised the way financial services are delivered. Since the benefits for all involved parties are vast, many banks and Fintech companies have implemented open banking APIs. 

Although pen banking API opens various opportunities for creating fintech products and services, the development process requires much effort and attention to detail. KMS Solutions has experience working with Australian BFSI businesses on a project involving open API integration, so we know how to do it step by step. Contact our experts now to discuss your idea!