Open banking, or “open bank data” as some prefer to describe it, has the potential to reshape the banking and fintech industries by providing consumers and businesses with more convenient and flexible access to financial services.
Open banking offers a lot of promise and some potential risks
However, to date, any meaningful traction has been limited to the UK, EU and pockets of Asia-Pac. And until we can drive broader adoption, its potential to benefit the global economy remains very limited.
There are some visible use cases in play today, for example: HSBC Connected Money (UK) allows customers to view various bank accounts as well as loans, mortgages, and credit cards, in one place. And Barclays Mobile Banking (UK) lets customers view their accounts with other banks within Barclays’ mobile app. The bank claims to be the first in the UK to enable account aggregation inside a mobile banking app.
Other applications typically include a lot of data gathering, e.g., determining financing options for buyers and sellers at retail or business checkout.
Opportunities and risks
Open banking offers a lot of promise and some potential risks. On the promise side, the ability to facilitate data sharing through the use of APIs can remove a lot of friction in financial processes. Think account validation, payment authorisation, and fraud detection. This is especially relevant in complex transactions like international payments.
Customers can also access new financial services through a current relationship and financial services providers can tailor financial products and services based on relevant customer data.
On the risk side, there is currently a lack of regulation and standardisation. That raises compatibility, security, and privacy concerns and creates a host of potential liabilities for financial institutions sharing customer data. The competitive aspect mentioned above is also a risk for financial institutions. Owning their customers’ financial data is no longer a barrier to said customers moving on to a new bank or service provider.
The current state of open banking
To date, Europe, and specifically the UK, has led the way. According to the June 2022 Open Banking Report by the Open Banking Implementation Entity (OBIE), 10-11% of digitally enabled consumers in the UK are using at least one open banking service. JP Morgan puts that number at over 5 million people. Much of that progress can be attributed to regulation. In 2018, the UK government mandated that the nine largest retail and small- and medium-sized business (SMB) account providers use open APIs to allow authorised TPPs to access customer-permitted data and initiate payments on behalf of clients.
There is reason for optimism in the US as well. The Consumer Financial Protection Bureau (CFPB) is reportedly moving ahead with additions to the Dodd-Frank Act which will make it easier for consumers to switch financial services providers by requiring banks and fintechs to share their data with other providers when consumers request it.
And there’s progress in other regions. Hong Kong has had the Open API framework in action for several years now. India’s regulator platform combines real-time payments and digital identity to encourage financial inclusion. And Australia’s Consumer Data Right framework provides clear guidance from a consumer data-sharing perspective.
A shift in focus to payments
Today, regulators, especially in the UK and Europe, are very focused on promoting competition and alternatives to card payments. Open banking can help banks deliver on that.
Successful open banking payments increased by over 130% last year. But that volume is limited to single-instance payments. Each one has to be authenticated each time. That friction restricts other payment use cases. Conversely, if open banking can be applied to recurring payments, that could open up the potential for huge payment volumes. Open banking also lends itself to new genres like micropayments, which are poorly suited for other methods like cards due to the economics.
Recurring payments also represent the first opportunity for banks to monetise open banking. That could be good and bad. On the plus side, banks would be incentivised to deliver a useful service. It will get their full focus and drive innovation in terms of new use cases and services for their customers. On the negative side, there is the potential for them to overprice open banking payments. If they charge the same rates as cards, it will defeat the purpose. People will stay with cards.
Predicting open banking’s impact
For businesses, open banking is all about speed and taking the friction points out of the payment process while ensuring the validity and security of the payment. But, for business adoption to reach critical mass, major banks will need to offer it at a cost less than credit and debit cards. Otherwise, it risks being a niche payment method for a small subset of customers.
For consumers, it comes down to convenience, but they may also see incentives for paying via open banking methods, assuming banks make it less expensive for businesses and merchants. In countries where there is no card infrastructure, open banking coupled with real-time payments (RTP) can gain critical mass rapidly.
There are some additional open banking use cases to watch out for in 2023 which all have the potential to accelerate adoption:
- Premium APIs – This would extend banks beyond pure payments and account information by opening up and leveraging existing bank data via exclusive API connections.
- Democratising consumer data – Open banking can also loosen the stranglehold banks have on customer data. Consumers’ financial lives would be made easier by negating the need to provide information every time they initiate a new financial transaction or relationship. Privacy assurances would obviously be a critical consideration here.
- Payment security – Open banking can strengthen payment security as a result of more data points to check against one another.
All of these use cases present opportunities for banks to monetise the tech they have already built by making it easier to share information securely with other systems. And that factor may be the biggest driver behind the increased adoption of open banking in 2023.
Post via: https://www.fintechfutures.com/2023/02/in-2023-payments-will-provide-momentum-for-open-banking-adoption/