Open banking’s unstoppable momentum
Just over three years ago, new open banking regulations, mandated by the UK’s Competition and Markets Authority, were introduced with the aim of fostering competitive markets and encouraging innovation.
The regulations require banks to disclose performance and fee data to make it easier for customers to compare the offerings and results of different financial providers.
Fast-forward to the present and Joe Biden’s Executive Order on Promoting Competition in the American Economy looks to loosen the rules on data portability in a similar way.
Central to these regulations is the enablement of application programming interfaces (APIs) so organisations can transfer data easily and effortlessly. With open APIs, customers can readily share their financial information with other providers – if they choose to do so.
It’s much easier for customers of big banks to transfer between their accounts, manage payments and conduct transactions through other banks and fintech organisations whose operations are solely digital.
For fintech, open banking is a big opportunity to carve out an even deeper digital groove in the financial sector by accessing individual and business-generated data to create more innovative apps and services.
It is hardly surprising then that banks are rethinking their relationships with fintech organisations to stay relevant.
The move to open banking recently received a boost when US president Joe Biden gave the go-ahead for executive orders enabling US customers to access and share their banking data.
Given the significant power of the US financial sector and an awareness that traditional financial institutions need to be more ‘digital friendly’ to survive and thrive, Biden’s open banking order is set to prise the market open and stimulate competition.
Big banks have watched open banking with a wary eye and have tended to not visibly support and promote it, but they already have access to a sizeable pool of customers and can gain insights into the products and experiences customers want. Banks can draw on their wealth of customer data from banking apps, cash flow, credit history, mobile location and browser histories.
However, Biden’s push for more openness also means fintechs can travel further down the road of innovation and tailored services because they can access and aggregate that same data to offer new services and consequently take customer accounts – and profit – from traditional banks.
This provides previously underserved consumers and businesses with an enhanced suite of financial products. We have already seen budgeting applications in which payment data is drawn from various sources into one app so consumers can manage budgets more easily.
As a result of Biden’s endorsement of open banking, there will be greater competition with new financial services emerging. Gaining access to their data will give consumers and businesses more power to switch financial institutions and smaller challenger banks in the US will be able to offer services using customers’ banking data.
When integrating with fintechs, banks use their infrastructures to carry out specific functions, but rely on fintechs for others. This means that different services need to be sharing data constantly to perform effectively. This is at the heart of API data sharing.
At a wider level, it also opens parts of the world that are not as financially literate, bringing more territories into the open banking fold and in its wake creating a raft of new opportunities for both established institutions and challengers.
Wider cooperation for wider innovation
To drive successful open banking globally, financial regulations need to be aligned and digital infrastructure needs to be flexible and accommodating to a range of businesses’ requirements.
For instance, banks and financial organisations that are located outside specific economic areas are governed by their own financial regulations and accessing digital infrastructure outside that jurisdiction can be difficult.
Banks, corporates, challengers and fintechs can address these issues by going beyond the mandates of banking directives.
Fintechs and challengers already understand that banking today is moving from a centralised position to decentralised operations. Their use of emerging technologies such as blockchain and artificial intelligence (AI) to provide a more personalised experience to customers is an example of this.
The combination of access to larger amounts of financial data and the power of AI will enable businesses and consumers to glean new insights from banking services.
The future success of open banking will depend on banks embracing an end-to-end digital architecture. This requires modern banking platforms based on open APIs, AI analytics, scalability and high security.
While major changes in the financial industry usually take time to fully evolve on a global scale, regulation directives continue to push the financial industry towards a more open model.