The Open Banking Revolution
If the rise of open finance continues at its current pace, it could alter the global financial sector and reshape the current banking model, which will add to the existing pressure on stakeholders.
Banks’ databases record every transaction. Until recently, this data was confidential. But, about five years ago, banks began sharing all that data with third parties, launching a major digital transformation in the history of banking. This movement has become known as “open financial data” or “open banking.” Open banking will impact key areas that will impact credit cards, mortgages, bank accounts, small business loans, and insurance payments.
This data is being used by third parties to offer products and services to the customers after getting their consent. Customers benefit from the greater ease and convenience open banking allows when it comes to making payments.
Countries worldwide have adopted, are in the process, or are planning to adopt an open financial model. Countries in favor of open banking at the government level are the UK, Germany, France, Spain, Italy, South Korea, India, Finland, Ireland, Czechia, Norway, Netherlands, Australia, Sweden, Hungary, Denmark, and Belgium. Those in the process of adopting open banking are Hong Kong, Brazil, Mexico, Singapore, Japan, Malaysia, and Turkey. At the same time, those that are taking initial steps towards it are Nigeria, the USA, Canada, Colombia, Indonesia, and Saudi Arabia.
Among these governments, most have told the major banks to open up their data troves. Some, like the US and China, have left it to the banks to form partnerships with third parties. While a few countries, such as Singapore, have adopted a hybrid model.
The very first legislation that pushed the banks to share their data was the 2016 European Union’s Payment Services Directive (PSD2). The UK’s Competition and Market Authority (CMA) followed suit by introducing an “open-banking standard” with the help of the country’s nine biggest banks. Till 2020, the UK issued about 200 third-party providers (TPP) licenses for open-banking Application Programming Interfaces (API) that allow for easier integration of new software with the existing system. Where such initiative was absent, companies got together and created market-led standards for themselves; for example, the Berlin Group (an association of 40 banks) created the NextGenPSD2 API standard.
The evolving digital habits of customers, partly due to the pandemic, have led to a digital transformation of financial services. As a result, the past few years have seen an exponential growth in the number of customers using fintech solutions such as immediate peer-to-peer payment solutions and nonbank money transfer services.
Open financial data has allowed technology companies to replace banks as major financial services providers. For example, Google launched Plex in November 2020 in partnership with Citibank to offer a mobile-friendly solution for banking. The Singapore government recently licensed five non-banking companies to provide financial services. This trend will lead to financial services integrated into the rest of a customer’s digital activity.
According to the Financial Conduct Authority (FCA), an open financial ecosystem will give consumers more options for financial service providers. Although it will lead to a more competitive environment for banks, shrinking the profit margin, which would have to be shared with fintech third parties operating on the consumer end. However, it is too early to say who will benefit from this revolution and who will sustain the loss.
Types of Open Banking Solutions
Nonbank stakeholders have taken an early lead in the open banking trend. For example, of the 259 open-banking licensed providers in the UK, about two-thirds were created by nonbank fintech companies. Of the remaining one-third created by banks, the majority were developed to aggregate different types of bank accounts into one system. In contrast, most nonbank fintech solutions were designed to provide a functional overlay for the aggregation. These fintech solutions fall into two main categories—infrastructure providing and customer-facing, with the customer-facing solutions either being augmentation for existing products or completely new user experiences.
Key Nonbank Players in the Open Finance Revolution
- Back-end Infrastructure providers. New technology players emerged that provide prebuilt digital financial solutions to banks and fintech companies, so they don’t have to develop an open financial solution from scratch. These companies offer back-end data access and transfer through APIs to customer-facing applications.
- End-to-end Infrastructure Providers. End-to-end infrastructure providers offer complete end-to-end white label solutions for fintech companies that they can customize and call their own.
For example, FusionIQ, a digital wealth management system, was developed by Croyten LLC for IQvestment Holdings LLC as a white label solution for banks, credit unions, RIAs, broker-dealers and wealth managers. FusionIQ provides financial services with unique enterprise-grade functionality that combines business, technology, and compliance logic in every deployment. Through its self-directed Robo-advice features, the FusionIQ platform is designed to allow investors and advisors to track, trace and house all their investments in one place.
- Product Augmenters: Product augments are solutions that use banking data to improve their product or service. For example, Alphabet’s solution, GoCardless, speeds up the transaction by allowing a direct payment from the customer’s account instead of the usual route of going through a Master or Visa card, thus cutting down both time and transaction cost.
- Customer Experience Providers: Unlike the other three types of solutions, customer experience providers cater to customers’ needs. For example, ING’s Yolt application allows customers to access all their bank accounts through one platform and utility bills, insurance, investment, mortgage, and pension accounts. While most of these solutions are being offered to individuals, some provide SMEs the ability to monitor their finances or digitally transform their businesses. Some of these solution providers also generate revenue by charging third parties that feature on their portal or by offering expert consulting services to businesses.
What the Future Holds for Open Finance
Currently, fintech companies only have access to the banking sector’s low-margin revenue streams, such as transactions and accounts. Open banking regulations have yet to incorporate banking products such as mortgages and investments. Moreover, the customer journey remains tedious, with multiple authentication steps, a back-and-forth between the open banking platforms and the customer’s bank’s website, and an extended customer consent window. However, it is safe to say that soon. The legislation will make it easier for fintech companies to find new revenue streams with reduced security protocols, which will ensure the exponential growth of the fintech industry.
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