Why your Open Banking Adoption Might Fail Without Strong KYC

#kyc #openbanking #fintech #verification

One of the recurring issues many companies face is the struggle to optimize their financial systems. Delayed transactions and complex integrations often happen because there’s no real-time data coming in from customers. In most cases, this is due to financial information being locked away in separate systems.

On top of that, customers expect smooth and seamless transactions, even as their needs continue to change. This growing demand creates more pressure on businesses to keep up.

To resolve these challenges, open banking was introduced. It's a model that gives integrators more control over financial data, making it easier for businesses to deliver fast, secure, and personalized financial experiences. And it’s not just for financial service providers. Traditional companies can also tap into these tools to make smarter, data-driven decisions and offer tailored financial services that match what their customers actually need.

Then again, open banking isn’t a silver bullet. While it brings major advantages, adoption is still slow, and keeping data updated can be difficult. There are real concerns around data privacy, inconsistent regional regulations, and potential security risks.. These challenges are part of the reality businesses have to navigate.

In this guide, you’ll get a clear look at what open banking is, how it works, what benefits it brings, and how Know Your Customer (KYC) practices play an important role in building a strong and reliable open banking framework.

What is Open Banking?

Open banking is a financial services framework that allows banks and other financial institutions to grant third-party services, like fintech apps, secure access to consumer data through application programming interfaces (APIs). This model changes how financial data is shared, gives consumers more control in a transparent, competitive way, and encourages innovation in financial services.

For businesses, open banking provides access to real-time financial data. This contributes to improved payment services and more efficient customer account management. It also enhances the user experience. Instead of asking customers to fill out long forms, apps and websites can access the data they need directly and securely.

Note that open banking isn’t a single product or service. It’s a framework that supports a wide range of financial services. As the ecosystem evolves, the scope of open banking will continue to expand. This means third-party providers and financial institutions will keep finding new ways to build smarter, data-driven experiences.

Here’s how businesses are already using it:

Loans and Credit Scoring: Lenders can assess creditworthiness faster using live customer data instead of relying on outdated reports.
Real-time Fraud Detection: With direct access to account activity, businesses can spot suspicious behavior sooner and respond quickly to protect funds.
Faster Payment Services: The financial services industry can initiate payments straight from a customer’s bank account, which speeds up settlement, reduces fees, and improves security.
Account Consolidation: If your business is in wealth management or financial planning, you can get a clearer picture of your client’s finances by pulling data from multiple accounts. This makes it easier to give tailored advice.
Personalized Marketing: Based on spending habits, businesses can send out offers and loyalty rewards that actually match how their customers shop, not just broad guesses.
Automated Invoice Reconciliation: By matching incoming payments with invoices automatically, businesses can save time, cut down on manual errors, and keep their cash flow healthy. ## How Open Banking Works

Open banking uses APIs to securely communicate and share financial data with authorized third-party providers. This only happens with the customer's consent, under strict rules and regulations that govern how the data is accessed and used. At a high level, here’s how the flow between open banking systems and third-party service providers works:

API Development: The first step is for financial institutions that want to support open banking to build secure, standardized APIs. These APIs make it possible for approved third-party providers to access customer financial data in a safe and structured way.
Customer Consent and Data Access: The customer must explicitly give consent before any data is shared. This consent must be clear, specific, and fully informed by law. Once consent is granted, third-party providers can use APIs to request and handle the data securely.
Authentication and Authorization: In addition to giving consent, the customer’s identity must be verified. The bank or financial institution also checks that the third-party provider is authorized to access the requested data. This usually involves the customer logging into their account or completing other verification steps.
Data Sharing and Usage: After successful authentication and authorization, the financial institution shares access to the data. Other financial service providers or third parties can then use this data to deliver specific services, such as showing account balances, analyzing transaction histories, or offering tailored financial insights.
Ongoing Consent and Security: One of the strengths of open banking is that customers stay in control. They can manage or revoke access at any time. Both the banks and third-party providers are required to follow the customer’s instructions and maintain high standards of security and data privacy.
Open Banking Regulations: Everything runs under a regulatory framework. These rules define what data can be shared, how consent must be handled, and what security measures must be in place. Regulators actively monitor all participants to make sure everyone stays compliant. ## Benefits of Open Banking

Open banking is changing the financial services space and opening doors for other industries. It gives businesses new ways to build compliant applications, offer smarter services that drive revenue, and keep them ready for whatever comes next. Here are some of the key benefits:

Improved Customer Experience: Open banking gives businesses a unified view of customers’ accounts, transactions, and other financial details. This makes it easier to offer personalized advice and access to multiple products without needing customers to switch platforms. For example, users can send funds and pay utility bills from the same app. Having access to several services in one place improves satisfaction and overall experience.
Regulatory Requirements: Open banking is built on standardized data protection protocols that are frequently updated. Because of these built-in practices, businesses can stay compliant with minimal overhead. There’s less guesswork and fewer surprises when meeting legal, regulatory, and security expectations.
Competitive Advantage: Businesses can use open banking to gain an early edge in the market and expand faster by partnering with local fintechs. Access to localized financial accounts and data makes it easier to customize offerings for new markets.
Data-Driven Products: With access to richer financial data, businesses can make smarter, faster decisions. Whether it's managing liquidity or exploring investment opportunities, open banking supports better planning and sharper strategy.
Lower Transaction Costs: By tapping into direct payment methods through open banking APIs, businesses can skip traditional payment gateways and reduce fees. Transactions are not only faster and more affordable, but they also have higher success rates.
Better Resource Management: Prebuilt APIs take a lot of heavy lifting off your team. That way, you can focus on improving the customer journey, building new features, or expanding your offering without being slowed down by complex backend work.

Even with these benefits and opportunities for innovation, open banking comes with its own set of challenges. It’s important to be aware of potential risks such as regulatory changes and security concerns. Let’s explore the main drawbacks.

Drawbacks of Open Banking

Below are some potential drawbacks of open banking:

Varying Standards: Not every open banking provider follows the same rules. If your app relies on multiple services, this mismatch can lead to inconsistent experiences for your users. You may end up dealing with service disruptions or integration bugs more often than you’d like.
Regulatory Difficulties: The growth of open banking continues to push innovation forward. With that comes ongoing changes to the rules and standards that govern how data can be used. Staying compliant can be time-consuming and may require either internal legal teams or external consultants.
Integration Overhead: In most cases, you’ll often have to stitch together multiple third-party services. That can lead to compatibility issues, longer development timelines, and a higher risk of bugs. Sometimes, it also means hiring external experts just to get the system working.
Vendor Lock-In: When you rely heavily on a specific open banking provider for core functionality, any change on their end becomes your problem too. This could mean unplanned downtime, service disruptions, or rising costs that are out of your control.
Security Vulnerabilities: Even with strong protocols, gaps can still be exploited. A security breach could result in more than just financial loss; it could also damage your reputation, create legal problems, and break customer trust.

At the core of open banking’s benefits and challenges is data. It’s the foundation of the entire system, and how you handle it determines whether your implementation is a success or a liability.

You need accurate customer data to build reliable, secure, compliant open banking experiences. Know Your Customer (KYC) is not just a regulatory requirement. It helps you verify identities, detect fraud, and personalize services. It’s how you strike the balance between security and convenience.

While KYC verification is essential to open banking, collecting and updating customer information still poses major challenges. These difficulties often come from trying to balance customer experience with compliance and operational costs. One way to manage these challenges is to use Flutterwave’s KYC and verification system. You can either integrate it into your open banking solution or use it to improve verification in an existing setup.

Handling KYC with Flutterwave

Flutterwave provides built-in tools to help you manage KYC efficiently. Here’s how it supports a reliable KYC operation:

BVN Verification API

The Bank Verification Number (BVN) is an 11-digit number used to identify individuals across all Nigerian banks. It was introduced by the Central Bank of Nigeria (CBN) to prevent fraud and confirm customer identities.

BVNs are valuable in open banking because they contain updated customer data such as name, date of birth, and biometric information. With Flutterwave’s BVN Verification API, you can update your customer records if you’re a provider or use it to cross-check data when your current provider does not supply full details.

The BVN verification process has two main steps:

Initiate Consent: Before getting a customer’s BVN details, you must first obtain consent from the customer.

curl -X POST https://api.flutterwave.com/v3/bvn/verifications \
-H "Authorization: Bearer <REPLACE_WITH_API_SECRET_KEY>" \
-H "Content-Type: application/json" \
-d '{
  "bvn": "your_bvn_here",
  "firstname": "John",
  "lastname": "Doe",
  "redirect_url": "add your redirect url here"
}'

Retrieve the BVN Details: After your customer gives their consent, make a request to the verify BVN endpoint using the reference returned above to get the details.

curl -X GET https://api.flutterwave.com/v3/bvn/verifications/your_reference_here \
-H "Authorization: Bearer <REPLACE_WITH_API_SECRET_KEY>" \
-H "Content-Type: application/json"

Check out the A-Z of BVN guide to learn more about BVN and the verification process.

Bank Account Verification API

Incorrect account numbers can lead to failed transactions, misdirected funds, and potential fraud. One of open banking’s advantages is the ability to lower transaction costs by using direct payment methods. However, if you collect account numbers during onboarding and do not verify them at that stage, you risk failed payouts and a poor user experience.

Flutterwave’s Bank Account Verification API lets you confirm that an account is valid at any point in the customer journey. This also helps when pre-filling account details for returning users.

curl -X POST https://api.flutterwave.com/v3/accounts/resolve \
-H "Authorization: Bearer <REPLACE_WITH_API_SECRET_KEY>" \
-H "Content-Type: application/json" \
-H "Accept: application/json" \
-d '{
  "account_number": "0690000032",
  "account_bank": "044"
}'

Card BIN Verification

Flutterwave also offers a Card BIN Verification tool that helps you validate cards before attempting a payment. This adds an extra layer of security and reliability to your payment processes. Check out the Card BIN guide to learn more.

Wrapping Up

Strong KYC processes are not just about staying compliant. They are the foundation of successful open banking systems. When you treat KYC as a strategic investment, you reduce fraud, build trust, and stay ahead of changing regulations.

Flutterwave simplifies KYC processes by offering: