As open banking expands, consumers and companies stand to enjoy lower fees, greater ability to leverage their financial data: if they can control the risk of stolen or misused data.
Open banking has been the next big thing in financial services seemingly for the last half-decade, dating at least from the EU’s adoption of the Revised Payment Services Directive (PSD2) in 2018. PSD2 was designed to facilitate online banking by requiring banks to release their data in a secure, standardized form, that can be easily shared by clients and organizations that clients authorize to receive it.
Propelled by PSD2 in Europe and the open banking directive in the UK the same year, fintechs and major banks in those jurisdictions have leveraged open banking to offer account aggregation, more comprehensive personal finance management, and faster opening of new accounts and credit applications, among other services. Merchants can use open banking solutions to improve their financial tools and payment flows.
Progress in some regions has been rapid and is expected to accelerate. Just two years after PSD2, a report by Allied Market Research pegged the value of the global open banking market at $7.29 billion and forecast it reaching $43.15 billion by 2026. A 2021 McKinsey report estimated the boost to GDP from broad adoption of open-data ecosystems could range from 1%–1.5% percent in 2030 in the EU, the UK, and the US, to 4%–5% in India.
Other markets, from Brazil to Australia to Nigeria, have implemented comparable changes. In the US—where nothing comparable to PSD2 yet exists—progress has been slower, nudged forward by innovative APIs that fintechs like Plaid, upSWOT, and Saltedge have developed to pull data from different banks and by large institutions’ concern that they might not be keeping up with the fintechs.
That concern has only grown of late as legacy banks feel the pressure not only to transform, but to transform quickly. Tech giants like Apple, Facebook and Google are using wider access to data and tools to offer their own digital payment services and fintech apps such as PayPal, Klarna, and Afterpay are making their own play for the territory traditionally held by banks.
The core principle of open banking, however, is that ownership of banking data resides with the customer, not with their bank or banks, and the objective is to give customers a wider range of possibilities to make use of their data. And while this gives technology companies more opportunities to create innovative products and services, banks have the chance as well to offer more efficient, secure solutions with more value-added functionality to their customers.
Aggregating bank account information enables consumers to better understand and analyze their overall holdings and cash flow. It also allows financial institutions such as loan providers to quickly access information from different banks. In the past, if an individual or business applied for a loan, the lender would have to gather large amounts of information about the applicant’s financial history. Under open banking, this long and resource-intensive process is replaced by APIs. The lender can digitally request information via the bank’s APIs and receive it in seconds with the applicant's permission. The process is faster and requires significantly fewer resources than before.
Data shows that a simplified, frictionless payment flow—with a single app or portal as its hub (increasingly over a smartphone)—significantly reduces cart abandonment and leads to improved sales.
Previously, for example, consumers often had to pay for goods by making an online transfer from their card or their bank account: in the case of card payments, incurring a transaction fee that inflated the cost of goods or services. Open banking disintermediates this flow by removing the interchange fee, thereby reducing the overall transaction cost.
In the case of bank account payments, the customer previously had to open several different tabs and work through an often clunky process to make a payment. With open banking, fintech companies have created smartphone-enabled apps for payment initiation that are powered by API integration with the customer’s banks. This has significantly improved consumers’ ability to manage their finances with just a few clicks.
Competition in these areas—payments, services built on aggregating account information—is affording companies and consumers a wider array of choices, but carries risks as well. Increased sharing of data between banks and third parties adds to the risk that data could be stolen and misused. That requires all parties to maintain a strong focus on financial integrity and cybersecurity.
That said, banks and fintechs clearly expect open banking tools and process to become a routine expectation for both consumers and corporate clients in the years ahead.
About the Author: Mayank Mishra is a veteran of the banking and technology sectors, with more than 25 years of industry experience, most recently as managing director and global head of digital channels for Citi. His expertise encompasses APIs, corporate treasury, liquidity management, digital transformation and more.