Open Banking has the potential to be the key to unlocking the future of financial services. It allows a greater flow of data, creating opportunities to use it more efficiently and effectively than it has been to this point, particularly by fintech firms. However, it’s worth noting that there are a lot of elements and angles involved in open banking and the exploitation of the data it provides. Bluntly, different data offers different benefits.
Before we start looking into that, let’s quickly summarise exactly what we mean by ‘open banking’. Also known as ‘open bank data’, it’s simply the practice of allowing third-party financial service providers (such as fintech companies) access to data from banks and non-bank institutions. This data is generally accessed through the use of application programming interfaces (APIs), meaning that the data can be quickly accessed when required.
What use is open banking?
In a world increasingly concerned about data security, we must inevitably ask why you would want third parties to access your personal financial information. As sensitive data goes, it does not get that much more sensitive than information about your finances and transactions. And yet the financial services industry is extremely excited about the potential of open banking, so there has to be something to it, right?
At its core, open banking and the APIs in use focus on improving the customer experience of banking, making managing your money easier and quicker. In its simplest form, it leads to apps allowing you to instantly check your balance and make payments and transfers — pretty simple stuff. However, using different data sets and getting a little creative can provide you with apps to budget, manage debt and get real-time investment and financial advice tailored to your personal circumstances rather than being general and vague.
Further applications for the data obtained through open banking include:
- Integration with AI, helping to anticipate your banking needs,
- Paperless cheque deposits,
- Foreign exchange and rapid remittance,
- Virtual banking.
Put simply, with some creative app development, you could have a bank branch on your smartphone. You would be able to handle every situation you might need to visit a bricks-and-mortar address for without having to waste your lunch break waiting in queues. Given the post-COVID environment of avoiding unnecessary journeys and interactions, it’s an opportunity that certainly cannot be overlooked.
If not by choice, by force
Open banking is not something that banks have necessarily gone into willingly. Previously, major financial institutions held the monopoly on helping people handle their money and opening up their data for third parties to profit from offering better, more efficient and more convenient services is no business’s idea of smart move.
Fortunately, the Payment Services Directive was introduced by the EU in 2007 and then updated with PSD2 in 2015. The directive’s main purpose was to regulate payment services and their providers within the European Union and European Economic Area, increasing the amount of competition available in this previously impenetrable industry.
One of the more technical provisos of the directive is that, from 2018, all banks operating in Europe will be legally obliged to allow access to their data through APIs, giving them no option by to get used to the idea or get out of Europe. To be fair to them, many banks have embraced the way the world is going and have started adapting. In fact, even banks outside of Europe and outside of the influence of PSD2 have started working with fintech companies to improve their customer experience through open banking.
Among those especially interested in the opportunities presented by open banking are those with large unbanked populations — that is, a lot of people who don’t even have a bank account, but still need access to banking and financial services. East Africa is a perfect example of this, with bank branches being few and far between in more rural parts of countries like Kenya, Tanzania and Uganda. India and other parts of South Asia have similar challenges while the emerging digital finance ecosystem in China has allowed companies like WeChat and AliPay to flourish thanks to data-sharing technology. Even some of the bigger banks in the US are striking data-sharing deals.
Making the most of open banking
Just having access to data is one thing, but actually using it effectively can be another entirely. In this regard, the fintech industry is naturally leading the way. In turn, fintech firms are responding to the needs of consumers, whether that’s banking customers or businesses. Indeed, it’s arguably small and medium-sized enterprises that benefit most from open banking. While they would not previously have had the resources to process transactions other than those using cash, they can now receive money for their products and services in any number of ways.
Daniel Packham, innovation officer at Barclays and a moderator on the fintech panel at the Open Banking Expo 2019, said, “we’re starting to get demand for solutions to help companies work better, faster, and smarter. Treasury teams are smaller than ever, they have more responsibility, and they are using old technology. As a result, incumbent banks need to adapt or risk losing customers to more nimble players.”
The uses for open banking in a post-COVID world alluded to earlier are also significant. A recent study by Juniper research revealed that 2.4 billion consumers currently use digital banking services, but the prediction is that this number will reach 3.6 billion by 2024 — a 54 per cent increase in just four years. Not only does digital banking make a huge difference for those locked in quarantine, but it plays an important role in the gig economy and others working from home or remotely. Transparency in foreign exchange and remittance also benefits those working overseas — expatriates, digital nomads and the like.
It’s more than just processing transactions, though. The data analysis and reporting tools becoming available can help businesses identify their strengths and weaknesses compared to their competitors — an essential feature in an increasingly competitive business landscape. There is also improved fraud detection by using AIs to spot abnormal consumer behaviour and other similar opportunities to consider.
All that glisters is not gold
It must be pointed out that open banking is not without its risks. These have mostly been identified and are constantly being addressed by app developers, banks and supervising authorities, but that does not mean that risks do not still exists. As stated above, financial data is inherently sensitive and making it more accessible is inherently risky.
In particular, the risks include malicious third-party apps exploiting the open banking APIs to clean out customer accounts, though this is considered a worst-case scenario. Lesser risks include common or garden variety data breaches and hacking.
Outside of direct risks to customers, there are also risks to businesses. The move towards open banking is likely to shake up the financial services industry significantly. While this could provide benefits for all but those companies rendered obsolete, it could also lead to an increase in customer costs as businesses merge in the face more small competitors. Such market consolidation has already been seen and widely criticised in other areas of the internet economy, including online shopping, search engines and social media.
Suffice it to say, exactly what will happen in the world of financial services as banks continue to open access to their data depends on a lot of factors. It's highly likely that the results will be predominantly beneficial for consumers, however, and that fintech will be the leaders in unlocking those benefits.
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