Open banking: Shaping the future of FinTech and Finance

“Open banking is not intended to replace traditional banking. Instead, it can be a powerful ally for legacy institutions to modernise and stay relevant in an ever-changing financial market,” writes Donal McGuinness, CEO of Prommt. 

Open banking has come a long way from being a mere buzzword, especially in the UK, where it has made impressive strides as an early leader in adoption. The consistent approach to open banking payments in the UK, led by the Open Banking Implementation Entity (OBIE) and key clients such as HMRC and banks, has driven significant adoption. As of May 2023, 96.4 million payments have been processed with an impressive 99% success rate, and the open banking user base has grown by 7 million.

Open banking has disrupted traditional banking by ending the monopoly on consumer financial data. The revised Payment Services Directive (PSD2) provided the regulatory framework for this, allowing fintech companies to gain access to this crucial data with customers’ explicit consent, and challenge incumbents with innovative technology.

The third Payment Services Directive (PSD3) will further amplify this, with a focus on connection quality and consumer adoption. Banks will be obligated to build permission dashboards to allow customers to see which third-party services are connected to their payment accounts.

However, open banking is not intended to replace traditional banking. Instead, it can be a powerful ally for legacy institutions to modernise and stay relevant in an ever-changing financial market. By not only adopting open banking through API-led connectivity, but by also seriously investing in it, banks can transform themselves into platforms that offer banking as a service and take advantage of being part of the new banking ecosystem.

Innovation in payment technology is driving open banking’s growth. Many paytech companies offer a range of payment orchestration controls to their clients. These tools empower merchants to effortlessly toggle between open banking, card, and other payment methods depending on variables such as geographic location, customer, purchase type, and value of the transaction. Payment orchestration enhances the adoption of open banking, enabling retailers to save on high card processing fees, eliminate chargebacks, and double their payment volumes.

According to Juniper Research, the global value of open banking-powered payments will surpass $330 billion USD by 2027, up from $57 billion USD in 2023 (representing a growth of 482 percent). By 2024, Western Europe is projected to account for 56 percent of global API calls. Furthermore, emerging use cases like bill payments are anticipated to contribute over $59 billion USD in global transaction value by 2027, expanding open banking’s potential.

This new era of financial data sharing enables small companies to compete with larger players. Favourable market dynamics are driving disruption in the remote payments market, with mobile devices, mobile banking, and regulatory support playing a major role. The digital space is now replete with the potential for data-driven decision-making, improved risk assessments, seamless payments, customer satisfaction, and retention.

Impact on Businesses

Easy and Fast Payments: With open banking technology, businesses can quickly, securely, and efficiently accept remote payments. This method ensures direct bank-to-bank transactions, skipping intermediaries for a smoother payment process.

Savings from Lower Fees: Open banking reduces transaction costs by reducing reliance on card-based systems. Significantly reduced card processing fees help businesses protect their profits and offer competitive pricing.

Fraud Prevention: The adoption of open banking APIs is predicted to reduce fraud by up to 61 percent by 2024. Open banking payments use advanced encryption and real-time authentication to protect sensitive data from cyber-attacks.

Efficiency in Operations: Open banking enables businesses to automate and simplify tasks such as accounting and compliance, resulting in more efficient and streamlined operations. It offers greater protection from card fraud and chargebacks, while reducing payment operation costs.

Happy Customers: Customers can easily pay using their mobile devices and trusted online banking apps for authentication, leading to increased satisfaction and higher conversion rates.

Impact on Customers

Empowering Choices through Open Banking: Open banking enables customers to selectively share their financial data with third-party providers, granting them access to a wider range of products and services. The data sharing is completely controlled by the client, who determines the extent of access to their bank information. This safeguard ensures that third-party providers only have access to relevant information.

Fortifying against Fraud: By giving customers greater control over their data, open banking provides a strong defense against fraud. Payments made through open banking use PSD2/open banking protocols and are protected by the same industry-standard banking security measures.

Impact on Banks

Data-Driven Insights: Open banking enables banks to access more customer data with consent, and gain insight into customer behaviours and financial needs. Banks can use these insights to personalise their offerings, refine marketing strategies, and improve customer engagement.

Enhanced Customer Experience: Open banking technology can be seamlessly integrated into various financial services, apps and data sources. Customers can access a consolidated view of their finances, make informed decisions, and transact effortlessly.

New Revenue Streams: By offering value-added services beyond traditional banking, through partnerships and collaborations with fintech companies and other third-party providers, banks can tap into new revenue streams.

Regulatory Compliance and Security: Open banking technology ensures that banks comply with evolving regulatory requirements. It fosters data security by implementing robust authentication mechanisms and secure data-sharing protocols, mitigating the risks associated with data breaches and fraud.

Open Banking, Open Finance and Beyond

In the future, Open Banking will evolve into Open Finance, allowing data-sharing beyond transactional bank account data. Other types of financial information, such as pensions, insurances, mortgages, stock trading and other wealth management accounts, will become accessible to authorised third parties, creating a more interconnected financial ecosystem.

This will improve user experience through tailor-made products and services, allow for wiser financial decisions and better financial management. It will improve efficiency and productivity for Corporates & SMEs and increase competition among financial services providers, spurring innovation, developing new services, and increasing demand.