Open banking is an emerging trend that has the potential to revolutionize the way we manage our money and access financial services.
Its potential? Best put by Greg Mitchell from First Tech Federal Credit Union, “Open banking and using APIs to securely share information will simplify, accelerate and drive greater transparency and “pull through” in the purchase or financing of products, the movement of money and other transactions.”
The state of Open Banking
In 2023, the landscape of Open Banking has significantly evolved since its inception in the early 2010s.
One major driver of the adoption of Open Banking has been the increasing demand for greater financial accessibility and convenience among consumers. With the proliferation of smartphones and the growth of e-commerce, people expect to be able to conduct financial transactions and manage their money anytime, anywhere. Open Banking enables consumers to access a wide range of financial products and services through a single platform, rather than having to use multiple apps or visit multiple websites.
Another factor contributing to the growth of Open Banking has been regulatory changes. In the European Union, the Payment Services Directive (PSD2) has required banks to open up their data and services to third parties, provided that the customers give their consent. In other regions, such as the United States and Asia, regulatory developments have been more fragmented. Some countries, like the UK and Australia, have implemented frameworks similar to PSD2 to promote Open Banking. In other countries, such as the US and China, regulatory approaches have been more reactive, with authorities taking a wait-and-see approach before deciding how to regulate Open Banking.
Despite the regulatory differences, the trend towards Open Banking has been global, with banks and fintech companies around the world exploring the opportunities it presents. In 2023, Open Banking has become a mainstream practice, with many banks offering APIs to third parties and a wide range of financial products and services being built on top of these APIs. According to the “Open Banking Global Market Report 2022” May 2022 report by ResearchAndMarkets.com, the global open banking market is expected to grow to USD 48.13 billion in 2026 at a compound annual growth rate (CAGR) of 25.9%.
If you want to read more about the history of Open Banking, we have written an article that goes back to the 1980’s and the technological innovations that triggered and fueled this trend.
The opportunities for Open Banking
Looking at 2023, one thing we expect to see is a continued adoption of open banking by traditional financial institutions. While many banks and credit card companies have been slow to embrace open banking, it seems likely that they will eventually come around to the idea, particularly as fintech companies gain a larger share of the market.
Open banking has been growing at a rapid rate since PSD2 came into force. In May 2022, the UK reached the milestone of 6 million open banking users, or 11% of the UK’s digitally-enabled consumers. For comparison, less than two years ago, there were only 2 million users. Some early predictions suggested we’d see 60% of the UK’s population using open banking by September 2023.
Progress in the EU has been slower than the UK, partly because of SEPA Instant coverage, as well as the inconsistency with which banks implement open banking user journeys. In June 2020, the European Banking Authority (EBA) stepped in, making it clear there must be parity between the online banking experience that banks provide directly to their customers and the service they provide through PSD2 APIs.
Another trend we might see in open banking in 2023 is the rise of personal financial management (PFM) apps. PFM apps allow users to track their spending, create budgets, and set financial goals, and they could potentially be linked to open banking APIs to provide users with even more detailed and accurate financial data. For example, a PFM app might be able to automatically track a user’s spending across multiple bank accounts and credit cards, and provide customized recommendations for how to save money.
Another area where open banking could have an impact in 2023 is in the realm of small business lending. Small businesses often have a harder time getting approved for loans from traditional banks, as they may not have a long credit history or collateral to offer. However, by allowing small businesses to share their financial data through open banking APIs, alternative lenders could potentially offer more tailored and flexible lending options.
Currently, one in four lenders currently use open banking technology, yet all that could change. A report published by Credit Kudos suggests adoption will significantly increase over the next two years, as 87% of lenders that said they plan to adopt open banking in the future are looking to do so within the next two years. This translates to 70% of lenders employing open banking by 2023.
Open banking could also potentially lead to the development of new financial products and services that we can’t even imagine yet. For example, a fintech company might use open banking APIs to create a new type of investment product that is customized to an individual’s financial goals and risk tolerance. Or a company might use open banking to create a new type of insurance product that takes into account an individual’s spending habits and financial risk profile.
The challenges
Of course, open banking also brings with it some potential risks and challenges. One concern is the security of financial data. If third parties have access to individuals’ financial data, there is a risk that this data could be hacked or misused. To address this concern, it will be important for open banking APIs to be securely designed and regularly updated to protect against cyber threats.
Another challenge is the potential for financial institutions to be disintermediated by fintech companies. If fintech companies are able to offer more innovative and personalized financial products and services using open banking APIs, traditional financial institutions could potentially be sidelined. This could lead to a shakeup in the financial industry, as traditional institutions try to adapt to the changing landscape.
Brace yourself for Open Finance
Open Finance will give both personal customers and companies the right to authorize third-party providers (TPPs) to access their data and initiate financial transactions on their behalf. The EU Commission has started work on an Open Finance regulatory framework, which may mandate Open Finance by law in the same way as PSD2 mandated Open Banking. This is set to unlock a new series of challenges and opportunities for businesses, as they become accustomed to a new regulatory framework and a new customer experience.
Key takeaways
Open banking has the potential to bring about significant changes in the financial industry in the coming years. While there are certainly risks and challenges to be addressed, the potential benefits of open banking – including the ability to offer more personalized financial products and services and improve the customer experience – are considerable. It will be interesting to see how the open banking landscape evolves in 2023 and beyond.
At Maxcode, we have first-hand experience in working with TPPs and Open Banking products. Our expertise recommends us, as we stand ready to provide assistance, consultancy and quality services to businesses in this market. If you’re interested, drop us a line at andreea.zanfirescu@maxcode.net.
