Will Open Banking deliver on its promise?

Rivo Uibo, Chief Business Officer at Modularbank explains what the term stands for, what it means today and where it’s headed tomorrow.

The term Open Banking has been circulating in the financial world for some time, although it only really gained momentum with the introduction of PSD2. But what is it all about?

What is Open Banking?

Open Banking is a concept of sharing financial data electronically and securely between third parties – strictly with the customer’s consent. For instance, if you have several bank accounts with different banks and you would like to access all of these accounts from one single point, a third party might be able to provide a solution to enable you to do this. However, in order to provide this service, they would need access to your financial data. Some banks – the most forward-thinking ones –– have already been granting third parties access to certain data feeds for several years. Now, thanks to the introduction of pan-European Payment Services Directive 2 (PSD2), all banks are legally required to do so, to some extent at least.

For Open Banking to work in practice, the electronic exchange of data has to happen in a well-structured and secure way via programming interfaces (APIs) that form the technical basis for the concept. However, more important than the actual technology behind it, is the change in mindset that banks need to adopt to allow this system to work. This is a shift in the fundamental way of thinking, and it is critical that banks do this if they are to understand and realize the value that Open Banking creates. It is primed to change the rules of the game forever, potentially turning the entire financial world upside down.

What does Open Banking promise?

It is fair to say that PSD2 has been of utmost importance, setting some ground rules for everyone and giving that necessary push towards an exposed and connected future – it is a great example of regulation that does not set boundaries but creates new opportunities instead. While traditional banks have kept their inner workings and data assets hidden from outsiders for decades, Open Banking now promises to shake up the market, enabling and unleashing new business models and ultimately leading to better customer experience.

Rivo Uibo

Let’s take a tangible example to illustrate how this works: Let’s say you wish to manage your money better, see what you actually spend it on and get notified once you’ve yet again gone over budget at a restaurant. Your bank does not have the technical capabilities to enable these services, but somewhere there’s a fintech that specialises in exactly this. They offer a service or a technology that can analyse transactions on accounts using Artificial Intelligence to identify patterns. The system understands that a debit from Tesco is most likely a purchase of food and that your bill from Vodafone is probably a recurring payment on a given date.

In an Open Banking scenario, the fintech can access your bank’s data streams via APIs, then make the analysis available to your bank again. It is your trusted bank that eventually offers you the value-add service that you were looking for, thus enhancing your customer experience. Open Banking therefore creates a new business model for the fintech, while the bank achieves customer satisfaction and in turn loyalty. A win-win-win situation for everyone.

Where can we see Open Banking in action?

Today, we are only at the very beginning of what should be seen as a long-term play with many milestones in its maturity curve. With a long way to go, it’s even more impressive that we can already talk about industry-leading examples – banks that look beyond what’s set out by the regulators and are eager to make the most of Open Banking.

One such pioneer is BBVA. The Spanish bank firmly believes that it is in the best interests of consumers that data is exchanged in order to promote innovation and development. BBVA has created an “Open Platform” that allows developers to access a wide range of APIs (after a security check). This allows developers to quickly and easily integrate services into their applications, for example, to process payments via BBVA.

Since an ecosystem only works if as many players as possible participate, more players will need to buy into the concept in order for Open Banking to truly reveal its value. Having BBVA, one of the largest financial institutions in the world act as a pathfinder will set an example for other industry players and help to move towards a greater awareness of the benefits that Open Banking can bring, for everyone involved.

What does the future hold?

Open Banking should be seen as the first step in a process towards a connected business world. PSD2 got the ball rolling by basically forcing banks to open up to a certain extent. As some banks then started to realise the benefits of Open Banking, we are now seeing a broader mind shift amongst banks, voluntarily opening themselves up to an even greater extent than required by the regulations. Hopefully, this trend will continue and we will see the concept of Open Banking gradually growing into Open Finance over the next few years, encompassing not only banks but the entire financial industry – including insurance and leasing companies.

The ultimate goal, however, is to reach a point where companies across all industries exchange their data, and by so doing they unleash an entirely new business world. We are still at least a decade away from living in this new world of Open Business, but the companies that recognise this development now and start adapting their business model accordingly today will be the winners of the future.