What is Open Banking?
In a nutshell:
Open Banking gives the end-user the ability to access their financial data and share them with other financial institutions. The customer controls which third party can access their data and how they can use that data under the open banking framework.
By giving all data control over to the customer - Open Banking can be a big, if not the biggest game-changer for the finance industry.
So, where are we right now with open banking?
I had the pleasure to sit down with some industry experts within Open Banking: Shaul David from Railsbank, Keith Grose from Plaid, Cyrosch Kalateh from Tink, Andries Smit from Upside, and Lars Markull from Weavr.io – to discuss the Status Quo and the Future of Open Banking.
First things first, every country implemented open banking strategies slightly differently. This comes down to the different maturity of banking infrastructure in each country. Whereas the Netherlands or France have made a significant improvement in infrastructure accessibility, countries like Spain are still a bit behind and mainly screen-scraping.
More than country differences – each bank has a different infrastructure so basically, you need to make a case bank by bank.
Open Banking won’t be overnight magic that makes financial data accessible for everyone – that’s alright but important to keep in mind when you’re following this journey of this over the next years and also when you’re looking at what happened until now.
One step back from where we are now, it’s important to know which strategy a country followed when they wanted to implement open banking and to get an idea of the bodies that are supporting financial institutions with implementing it.
The EU implemented a regulation called PSD2 to foster competition and innovation in the market.
Where are we now – one year after PSD2?
The usage of Open Banking services was rather low but it has seen an uptake over the past few months – from a customer perspective. Covid pushed the end-customer away from the branch and towards online financial services providers which also led them to use other providers and made them discover new services.
But since banks are relying on very old infrastructure the integration and data accessibility are still very difficult. There is a lot of communication needed between Banks, Fintechs, Regulators, and bodies like OBIE or Berlin Group needed to solve these issues.
Who is benefiting from Open Banking?
Big tech companies are realising that open banking holds a lot of opportunities to integrate tools and services into their product.
If you just look at the new launch of Google Pay it offers you a wide range of financial services. Big Tech companies also have one immense advantage – they are meeting the customer where they already are.
Banks due to size and infrastructure have a longer and more costly cycle of implementation, however their big advantage is – they already have trusted products they can cross-sell or build on. And – even more important – they have data. New (Fintech) companies in that scenario still need to collect all that data.
For Fintechs and startups, it became a lot easier to test a business model built on top of financial data. Fintech can react quickly to the market and therefore increase competition and create new use cases. If a Fintech chooses the right use case their speed and flexibility set them apart from banks and make them gain a lot of traction and customers quickly.
But the regulatory requirements can still be big enough hurdles, Start-ups (except those with huge funding) can have difficulties to meet them due to monetary issues.
What are the takeaways here?
Cooperation between Fintechs and Banks can be key. Fintechs bringing innovation and flexibility in, and banks providing data and having the finance to make it happen.
Regulations in some scenarios should be measured proportionally to the size of the company. Your needs are different if you have 10,000 clients or 10,000,000.
Open Data is key. When banks are required to share data they need to be required to share everything. Sharing only selective data would mean to open the market and also destroy the market.
From Open Finance to Open Data - Has Open Banking already reached its full potential?
No. Open Banking should be considered as only one small puzzle piece towards an Open Data Economy. If we look at Australia or India they started with the implementation whilst looking at the bigger picture. An Integration of data into areas like healthcare, insurance, or telecommunications makes it easier to push all in the same direction. Banks are not the only ones that are required to share their data, multiple other industries need to do the same. It will also allow the consumer to get a better understanding of the benefits open data can deliver them and gives them full control of their data.
What's happening on the consumer side?
Consumers have been rather slow in the uptake of Open Banking services but during Covid when the bank branches had to close and they had to use online services, started to discover and make use of open banking services and products. Still, giving “away” credit card credentials is making consumers uncomfortable, especially with new market players that didn’t build up too much trust with them yet. There is a lot of educational work that needs to be done here that makes consumers understand that seamless experiences they have in other areas (e.g. logging in in one click on websites with their google e-mail) can be the same with banking services.
There should also be easy and consumer-friendly information be accessible. There is so much going on in the world of open banking that right now you basically have to read through a jungle of information.
What was the impact of Covid on Open Banking?
On one side, Covid slowed down the PSD2 switch and took away speed. This year many other issues have had higher priority. On the other side, as mentioned before is pushed towards the uptake of online financial services. This doesn’t only count for end-consumers but also on the merchant side. Open Banking can enable a merchant to be his own payment provider if you look at e.g. Zalando Payments some e-commerce players are already making use of that.
Open Banking is one of the hottest buzzwords in Fintech and can change the way we use financial services and how they integrate into a consumer's daily life. Open Banking has a lot of potentials to help in various other Fintech areas such as WealthTech and related areas such as Insurtech. There is still a lot of work to do on the interface side, but also the education side for the consumer. Once those issues are solved and when everybody is pulling in the same direction – Open Banking has the possibility to completely disrupt the Financial Services industry.
If you are interested in hearing more about trends within the Fintech scene or you’re looking for talented people working in Fintech and Open Banking, please reach out to firstname.lastname@example.org.