Open banking evolution
There is little doubt the proliferation and success of open banking has taken hold across the globe. As of January 2021, the UK counts over 2.5 million consumers and businesses as active open banking users, while API call volume has increased from 66.8 million in 2018, to nearly six billion in 2020.
Uptake of open banking across nations which traditionally adopt regulatory rather than market-driven approaches such as Hong Kong, Brazil, Australia and soon Mexico, solidifies the initiative’s role as a growing pillar within financial services.
In addition to this, interest from Singapore and the US cements open banking’s nature as an agile, adaptive offering that develops consumer appetite wherever it emerges.
Building on open banking principles, namely the sharing of data to third party providers, the broader concept of Open Finance takes a more holistic view of the possibilities that data presents to financial products and services.
The evolution of open banking into the much broader Open Finance or Open X may feel a little premature at first glance, but a light scratch of the surface reveals that the industry has already commenced the next step of the journey.
Open Finance is exciting for a number of reasons, most importantly, it will give consumers increased control over their financial lives and inject competition and innovation into financial sectors that have stood still for too long.
I think there’re 6 key ingredients for Open Finance:
1. Access rights: PSD2 gave customers the legal right to use third-party providers to access account information and initiate payments. This right stops banks from prohibiting the use of third parties and makes it an obligation for them to facilitate third party access. It was the key catalyst for open banking. As with PSD2, the legal right for customers to access finance data using third party providers should be front and centre. This will provide the impetus for financial institutions holding valuable data to consider how to facilitate access and create the catalyst for Open Finance innovation.
2. Mandating API use: Without rules to mandate use of APIs, data access for open finance
will be fragmented and inefficient. PSD2 demonstrated how allowing optionality in how to provide access led to the continuation of forms of screen scraping, which leads to poor user experience and ultimately locked customers out of open banking. Financial institutions will not embark on API development voluntarily — they need a regulatory driver.
3. Keeping rules high level: Although access rights and APIs will require rules, these don’t have to be detailed and prescriptive. PSD2 was a lengthy 5 year project because it delved into technical standards. Authorities should stop at high level rules facilitating access and mandating APIs and allow industry to collaborate on the rest.
4. Foster collaboration: Once a high level legal framework for open finance is in place, authorities can help move things forwards by bringing together data holders and third parties to define the details of the access regime, define use cases, test access methods, develop potential standards, and provide feedback. Authorities can build on the experience of regulatory Sandbox initiatives, to create an Open Finance Testing Environment.
5. Incentivising data holders: Mandating APIs doesn’t mean the data holders can’t commercialise their APIs. A downside of PSD2 was that banks treated APIs as a compliance exercise, rather than a revenue generator. Stakeholders in Open Finance should be open
to revenue sharing models agreed on an objective and proportionate basis. This should incentivise data holders to build well performing APIs. Discussions for commercialising open finance are already happening in the EU with the SEPA API working Group and the Berlin Group’s ‘Open Finance API’ programme.
6. Addressing PSD2 gaps: The question of access rights immediately gets us to another hard learnt lesson of PSD2: defining scope. Under PSD2 a customer can access their current accounts using account information services, but not their savings or investments. The limited scope of PSD2 reduces the convenience for consumers. The starting point for open finance should be to fill gaps in PSD2 — enable consumers to access their savings and investments in the same way they can access their current accounts and credit cards under PSD2.
open banking payments are going into industries such as wealth management, trading and gaming. Essentially any platform, app or website that incorporates taking payments can take advantage of open banking payments and see significant benefits.
Wilson exemplifies these benefits. First, i think that faster, seamless bank to bank payments create a better user experience compared to card or manual bank transfer.
They also help to boost checkout conversion because the customer doesn’t need to remember any payment details, or card or account numbers. Instead, they can use their phone and biometric authentication on their bank app.
