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Open Banking and Debt Collection

Open Banking and Debt Collection

Data is the fuel powering modern society. Everything consumers do is tracked and analysed, with the data that they generate then used to optimise their experiences going forward. This applies to everything from eCommerce (such as Amazon) to finance. 

Consider Open Banking, for instance, which has transformed the banking sector:    

  • According to Accenture, “as much as $416 billion in revenue will be at stake as the open data wave arrives”.
  • PwC figures suggest that Open Banking has created a £7.2bn revenue opportunity.
  • While an estimated 86% of all global banks are looking to use open APIs to enable Open Banking capabilities in the next 12 months. 

This blog will examine Open Banking in closer detail. It will outline what it is, how it works, why it benefits both consumers and organisations, the potential risks, and how it can be used within the collections process.  

What is Open Banking?

Essentially, it’s when banks grant third parties (usually tech startups or financial service vendors) access to their customers’ personal and financial data. This can only happen with the customers’ consent—for instance, they might be asked to check a box on an application form or on a terms-of-service screen. 

Once they give their consent, third-party providers can then use APIs to connect to the bank’s system and retrieve the customers’ data. They might use it to tailor the products and services that they sell to each customer or to create target marketing personas, for example. 

The benefits of Open Banking

When it’s done correctly, Open Banking can bring tremendous benefits to both consumers and financial institutions. 

1. Consumers

Consumers mainly benefit from receiving tailored product and service offerings. This doesn’t just apply to financial products themselves. For example, when consumers are looking for a new home, providers can use open banking data to offer targeted suggestions that take into account the consumers’ financial context, spending habits, and transactional data. 

Open Banking can also help when it comes to applying for credit. Lenders want to know as much information about their consumers as possible before giving them a line of credit. This might include their transaction history, existing credit card debts, and so on. Open banking enables automated credit credit checks, providing simplicity and a seamless experience for both customers and lenders.

Last but not least, Open Banking aids account aggregation. In other words, consumers can use APIs to gain an overview of their various different accounts in one place. Rather than having to log into multiple apps, they can simply see all must-know financial data in a single interface. 

2. Financial institutions

Open Banking has the potential to redefine how organisations operate, shaping both the services that they deliver as well as the way that they interact with consumers. That said, there’s still plenty of work to be done. As the image demonstrates, a reasonable portion of financial institutions (28 - 34%) has already seen a significant influence from Open Banking. 

Source

It’s no surprise that consumers love Open Banking. It makes it easier for them to open accounts, access tailored products, apply for credit, and see their finances in one place. As a result, financial institutions that offer Open Banking capabilities provide a better customer experience—and benefit from increased customer satisfaction. This means that they will retain more customers over the long run, while their reputation will also grow. 

With open data, financial institutions will also be able to future proof their own businesses. By having access to their consumers’ data, they can more accurately understand how they behave, predict what they will need going forward, and build products and services that meet their consumers’ needs. No longer will financial players have to devise growth strategies based on hunches and assumptions. Instead, they can gain deep, data-driven insights to fuel their strategic decision-making.  

Lastly, it increases collaboration throughout the financial sector. Financial institutions, whether legacy-minded banks or innovative new FinTechs, must now work together to serve their customers’ needs. Open Banking only works if every link in the chain does its job.  

The risks of Open Banking

Despite its benefits, there are a few potential drawbacks to Open Banking. 

The most obvious is data security. Increasing access to consumers’ personal and financial data is risky business—and involves a significant transfer of trust. Transaction data is particularly valuable as attackers can use it to better understand both consumers as well as the financial institutions that they deal with. 

Unsurprisingly, increasing the number of institutions with access to this type of data drastically increases the likelihood that a breach will occur. Smaller FinTechs might be more susceptible to security breaches than the large financial institutions whose data they work with. For example, they might have inadequate security protocols, or poor coding standards.

Every single component of the Open Banking ecosystem works together. Therefore, it only takes one data breach to impact the rest of the chain. 

How Open Banking impacts debt collection

By using the power of Open Banking, collections managers can gain a wealth of key insights into their past-due customers’ financial history and behaviour. For example, they can contact consumers on their preferred channels and at a time that best suits them. They can increase their repayment rates while decreasing the amount of time and energy they spend chasing past-due customers. 

But this is only possible with an all-in-one collections management software that offers artificial intelligence (AI) and machine learning (ML)-fuelled data gathering and analysis. This data can then be used to segment customers, send out tailored dunning messages, and increase repayment rates. With all the open data, financial organisations can then use this information to devise tailored dunning strategies that will be more likely to result in swift repayments and increase their overall recovery rate.

Author
Chan Hsuan Hung
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