The place of AI in open banking solutions
MAY. 29, 2024
Dive deeper into how open banking platforms work and how AI acts as the engine driving this digital transformation in financial services.
For millions of Americans, the modern banking system leaves much to be desired. Nearly 6 million households are entirely unbanked, lacking access to the fundamental financial tools most consumers take for granted: a safe place to park savings, the ability to build credit, and the convenience of online banking.
But even for those who are banked, keeping track of finances can be a frustrating juggling act. Information and accounts are scattered across different digital platforms, making it difficult to gain a high-level view of one’s financial health.
Open banking, powered by AI, is changing this equation. It’s a win-win for consumers and providers alike — consumers get access to better services, while providers can create more personalized offerings.
Dive deeper into how open banking platforms work and how AI acts as the engine driving this digital transformation in financial services.
What is open banking, and how does it work?
Traditionally, consumers’ financial data has been siloed within their banks, making it hard to access outside services and see all their accounts in one place. Open banking shatters these silos, putting individuals in control of their financial information.
Here’s how it works
Secure application programming interfaces (APIs) act as digital bridges between a bank and authorized third-party providers, allowing users to share data with them easily. This information can be anonymized (like general spending patterns) or identifiable (like account details).
Anonymized data allows budgeting apps to better understand users’ spending habits and make recommendations accordingly. For instance, an app might notice their daily latte purchase and suggest brewing coffee at home to boost savings.
But open banking can be even more powerful. With users’ permission, third-party apps can access identifiable information like account numbers, allowing for a truly personalized experience. Imagine a wealth management platform that can see an entire investment portfolio and recommend strategies based on one’s specific risk tolerance and goals.
Open banking unlocks a host of benefits by putting consumers in the driver’s seat of their financial lives. These include:
Unified financial view
Instead of toggling between different websites, consumers can access a single dashboard that displays all their accounts.
Enhanced payment flexibility
With an open banking API, users can connect various payment methods to a single platform.
Need to pay a bill?
Choose the most convenient option, regardless of the provider. Maybe it’s a debit card with one bank, a loyalty program reward with an e-commerce site, or a savings account with a credit union.
Increased competition and innovation
Open banking solutions make it easier to switch between financial institutions, which will spur providers to improve their services to keep customers.
Open banking promotes financial inclusion by giving lenders access to more data points through APIs. This expanded data visibility allows lenders to offer products and services to individuals previously excluded from the traditional banking system due to limited documentation or credit histories.
By considering alternative data sources enabled by open banking, lenders can extend financial access to unbanked and underbanked populations, fostering greater economic participation.
Open banking is good for providers, too
Along with the range of benefits it provides consumers, open banking can also help financial institutions.
Deeper customer insights
Rich, specific datasets assist financial institutions in understanding their customers on a granular level. Knowing an individual’s spending habits, income streams, and financial goals allows the financial institution to tailor products and services based on the consumer’s unique needs.
For instance, a bank could offer targeted savings plans to borrowers saving for a down payment or suggest investment options aligned with a particular customer’s risk tolerance.
Better risk management
Open banking data can provide a more holistic view of a borrower’s financial health. This allows financial institutions to make more informed lending decisions that lead to fewer defaults.
Unlocks the power of open banking data
The treasure trove of data unlocked by open banking is a goldmine for financial institutions. But accessing the data is just part of the equation — you also need to be able to analyze it at scale.
This is where AI enters the picture.
AI: The engine driving personalized finance
Open banking platforms thrive on huge amounts of anonymized data flowing freely between institutions. The problem is, historically, financial institutions didn’t have tools powerful enough to manage these massive datasets.
That’s changed with AI-powered algorithms. These models can churn through vast amounts of anonymized data points, including spending habits, income streams, and even individual financial goals.
This empowers financial institutions to move beyond generic financial products and services, ushering in a new era of hyper-personalization tailored to consumers’ specific needs and goals.
Here’s a deeper dive into how AI is fueling the open banking era:
Unveiling hidden patterns and behavioral insights
AI goes beyond merely analyzing a consumer’s current spending habits. Machine learning (ML) algorithms can predict their future behavior based on recurring patterns and make suggestions accordingly.
For example, AI might detect a tendency to overspend at restaurants on weekends, prompting suggestions for alternative dining options to help them hit their financial goals.
Predictive analytics for a brighter financial future
AI can leverage wide-ranging anonymized datasets to predict potential shortfalls or opportunities.
This can range from flagging fraudulent activity on an account before damage is done to nudging a user to increase their savings contributions to reach a down payment goal.
Tailored financial planning
Traditional financial planning relies on basic, high-level client data, limiting personalized recommendations. However, AI can analyze granular details like income history, spending patterns, and risk tolerance to create hyper-personalized financial plans. By leveraging this in-depth insight into individual financial profiles, AI enables an unprecedented level of customization and precision in financial planning tailored to each client's unique circumstances.
By suggesting savings goals and investment strategies based on an individual’s overall financial picture, AI can help them plan for major life events like retirement.
Security considerations
While vast, anonymized datasets can power AI recommendation algorithms, opening the floodgates of financial data also increases the potential for data breaches.
Financial institutions must ensure that they have a robust security framework in place to protect client data and funds in this new era.
Step confidently into the future of finance with Lumenalta
The future of banking is open, with estimates showing that there will be more than $330 billion in open banking transactions globally by 2027.
It’s an exciting time, but new challenges have emerged.
Implementing custom-built security solutions to safeguard customer data is paramount as banks navigate sharing data across platforms. Striking a balance between leveraging data for innovation and ensuring robust data protection is critical. Investing in cutting-edge security is essential for banks to capitalize on open banking while maintaining customer trust and avoiding vulnerabilities.
Financial institutions need a partner who can help them leverage AI and ensure the security of their customers’ data.
That’s where Lumenalta comes in — our deep bench of experts brings a wealth of knowledge in financial services, AI, and security. We can help you design and implement customized open banking solutions based on your unique traits.
