Open Banking — the next growth engine for the Banking sector?
Open banking refers to a framework in which financial institutions are required to provide third-party providers with access to their customer’s financial data through APIs (Application Programming Interfaces). This enables customers to securely share their financial data with third-party providers, such as FinTech companies, to access a wider range of financial products and services.
Open banking was first introduced in the European Union with the Payment Services Directive 2 (PSD2) in 2018. This regulation required banks to provide third-party providers with access to customers’ account information and payment services. Since then, many other countries have introduced similar regulations, including the United Kingdom, Australia, and Singapore.
Over the years, open banking has evolved to include a wider range of financial data and services. For example, in the EU, the revised Payment Services Directive (PSD2) requires banks to provide access to account information services (AIS) and payment initiation services (PIS) via APIs. The EU also introduced new account information service (AIS) and payment initiation service (PIS) providers.
Disrupting the Traditional Banking scenario
Since its inception, Open banking was expected to revolutionize the financial services industry by providing customers with more personalized, convenient and faster financial services, and by making it easier for customers to access a wider range of financial products and services. The framework was also expected to increase competition in the financial services industry, and enable innovation in the financial services industry.
In the past few years, open banking has managed to deliver on many of these expectations. The framework has enabled third-party providers to develop a wide range of new products and services and has also led to increased competition in the financial services industry, with many FinTech companies and other third-party providers using open banking APIs to develop new products and services.
FinTech companies, for example, have been able to use open banking APIs to develop new products and services that can be accessed directly by customers through their mobile banking apps. Some of the most notable examples include:
- Personal financial management (PFM) apps: Open banking has enabled third-party providers to develop PFM apps that can aggregate customers’ financial data from multiple sources, such as bank accounts, credit cards, and investments, in one place. This makes it easier for customers to track their spending, set budgets, and monitor their financial progress.
- Open Banking-based lending: Open banking has enabled FinTech companies to develop lending products that can be accessed directly by customers through their mobile banking apps, making the process faster, more convenient and more personalized.
- Payment initiation services: Open banking has enabled third-party providers to develop payment initiation services that can be accessed directly by customers through their mobile banking apps, making it easier and faster to make payments.
- Advanced analytics and customer profiling: Open banking has enabled third-party providers to develop advanced analytics and customer profiling services that can be accessed directly by customers through their mobile banking apps, making it easier and faster to understand customers’ financial needs and preferences.
These innovations have disrupted the traditional banking industry by providing customers with more personalized, convenient and faster financial services, and by making it easier for customers to access a wider range of financial products and services. This has led to increased competition for traditional banks, which are now facing competition from FinTech companies and other third-party providers that are using open banking APIs to develop new products and services.
As a result of this disruption, many traditional banks have been forced to respond by investing in their digital capabilities and by partnering with FinTech companies and other third-party providers to develop new products and services.
Open Banking — An Enabler more than a Competitor
While some might have thought Open Banking will eventually lead new FinTech players to replace Traditional Banks, we have not seen that scenario play out yet. This is primarily because the regulations for open banking have generally favoured traditional banks by making it harder for FinTech companies to access customer data and capital or develop new products and services. This has limited the ability of FinTech companies to disrupt the traditional banking industry and has maintained the dominance of traditional banks
Open banking protocols have solidified the market position of major banks by allowing them to securely and efficiently share customer data with third-party financial service providers (FSPs) through APIs. Banks have started to offer open banking APIs to enable third-party providers to develop new products and services that can be accessed directly by customers through their mobile banking apps.
This enables customers to access a wider range of financial products and services, such as budgeting tools, investment platforms, and lending options, through their existing bank accounts. By participating in open banking and acting as trusted data custodians, major banks can maintain their role as the primary point of contact for customers’ financial needs and continue to generate revenue through fees and commissions on third-party products and services. Additionally, open banking can provide major banks with valuable insights into customer behaviour and preferences, which can inform product development and marketing strategies. Overall, open banking can help major banks stay competitive and relevant in a rapidly evolving digital financial landscape.
Conclusion
Even though the adoption of open banking has been slower than expected in some countries, and challenges such as security and lack of standardization persist, Overall, open banking has evolved over the years to become more secure, more standardized, and more widely adopted. It has also become a key enabler of innovation in the financial services industry, with many FinTech companies using open banking APIs to develop new products and services that can be accessed directly by customers through their mobile banking apps. The future of open banking will likely involve continued growth and innovation, as more financial institutions and fintech companies adopt open banking and as further steps are taken to ensure the security and privacy of customer data and facilitate further interoperability between financial institutions.
