Account Aggregation: A Must to Open Banking
Account Aggregation is not a new phenomenon. It was around 2 years ago in 2019 when we saw the PSD2 take hold. Across the world, giant banks such as BBVA and NatWest have adopted account aggregation. It's then only a matter of time until it is implemented without exception.
Due to its popularity, account aggregation deserves a close review. This article will explain what account aggregation is, how it works, and what challenges banks might face when applying account aggregation.
Table of Contents
1. What is Account Aggregation?
2. How does Account Aggregation work
3. Benefits of Account Aggregation for banks
4. Challenges of Account Aggregation
What is Account Aggregation?
As an app feature or a large software, account aggregation compiles customer’s information from different accounts into one place
Basically, account aggregation functions like a connector. It pulls data from checking, savings, investment, credit card, or business accounts together. The data can be plugged into app types of applications:
- Retail Banking application
- Business Banking application
- Budgeting and personal finance management apps
- Wealth management platforms
- Customer Data Platform
And many more…
How does Account Aggregation work?
There are two ways banks offer account aggregation. The first is within only a single bank. The second is when account aggregation includes assets managed outside financial institutions if customers consent to.
Through account aggregation, banks offer customers the option to ‘aggregate’ data from all of their accounts, as well as the services of other institutions that the users have their accounts with.
To activate and use these accounts, customers are usually required to provide their credentials (username and password) if they wish to enjoy all the features and benefits. With the provided information, data from each account are downloaded and included in the aggregation.
The most two popular methods of data aggregation are screen scraping (also known as data scraping) and direct connections.
- Screen scraping is when data is gathered from one app by inputting user credentials (such as username and password) and that data is displayed in another app.
- Direct connections happen via application programming interfaces (APIs).
It’s important to note that the data is in read-only format, which means users and the parties trying to access the data can only see them, and not be able to change them.
Benefits of Account Aggregation for banks
It’s clear that account Aggregation helps customers to see and manage all of their accounts in one place. So how can account aggregation benefit banks? It seems like account aggregation is putting banks at a disadvantage since they have to give away precious customer data. But in fact, account aggregation is the very pillar of Open Banking, which requires banks to share their customers’ data via a standardized API format with authorized third parties.
Enhance Banking UX and Augment the Banking App
The quickest wins banks can achieve are user experience and design. Thanks to account aggregation, banks can aggregate users' all account information into one app, making it the go-to channel for viewing balances.
By investing a little bit more development efforts, banks can provide real-time spending insights by analyzing user data. This analytical feature will help customers manage their finance better, which improve their engagement with the app.
Rapid verification to avoid non-performing loan
Lending accounts for much of retail banks' profits. However, lending the wrong money to the wrong person could lead to a non-performing loan. Though non-performing loads are a part of banks' business, keeping them under control is key to healthy profitability.
Thanks to account aggregation, banks can have a real-time view of the potential borrowers' financial health. This data can be included in the credit evaluation process, which helps banks avoid bad loads or match borrowers with better terms.
Challenge digital challengers
Even though the Open Banking movement and advances in tech and design-centric thinking over the past decade paved the way for a multitude of neobanks and startups, their product offerings remain niche and relatively thin compared to those of traditional banks.
Indeed, these startups focus on the most basic banking functions, providing (pre-paid) debit cards and other light products to convert users quickly. On the other hand, since traditional banks already have a host of profit-generating products, they can leverage account aggregation to counter-challenge their challengers.
By applying design thinking, banks can build an engaging banking app, aggregating all their customers’ global bank accounts--whether they are offered by them or by their competitors.
Then, armed with a refined buyer profile extracted from categorization insights, the bank can offer the user insurance, loans, and other in-house products, which their challengers don’t have.
Challenges of Account Aggregation
Nevertheless, many banks face some problems when aggregating accounts, particularly in privacy and data protection.
Customer privacy and consent
Convincing customers to share data can bring banks both benefits and liabilities. In fact, customers do not fully aware of data privacy when deciding to provide their personal credentials. According to the Clearing House 2019, only 21% of customers actually understand that account aggregation will keep accessing their data until they revoke it.
This presents a problem, since customer privacy and consent is essential to account aggregation. Banks are responsible for ensuring customer's privacy, and gaining their consent.
Next is about how secured is account aggregation. The prime goals of many open banking initiatives indeed are to promote unified API standards and authentication frameworks. But we’re still a long way until achieving unified standards for data aggregation.
To offer account aggregation, banks are often forced to:
- Carefully evaluate current API integrations against current security, networking, and compliance standards
- Standardize APIs to meet criteria and adopt extra security measures (such as data encryption)
- Modernize legacy banking architecture to adapt to new external integrations without impacting security.
Last is the need for a strong data governance platform, which plays the told of a technical control panel to support your customers’ financial hub. It is crucial to know where all aggregated data stays, who has access to it, and how it’s being used and analyzed in order to ensure the security and compliance of account aggregation.
To build a governed account aggregation infrastructure, banks must have measures for constant monitoring and proactive risk management. Some best practices are:
- Developing practices for vulnerability management
- Performing regular patching and strengthening platform resilience
- Using traffic monitoring solutions to manage operational/security concerns
- Incorporating the necessary technological means to prevent data breaches.
Banks to account aggregation, banks and financial institutions alike can understand their customers and their financial health better, and customize products and services to meet their needs, and support more informed decision-making. Banks that start to adopt account aggregation will sure have a leg on the digital banking race.
If you want to learn more about Digital Banking, download our latest paper on "Must-have Features of Banking Application".