Open banking is changing financial services worldwide, and the way consumers are accessing their account data and making payments will never be the same.
Thanks to the partnerships between the payments industry and fintech companies over the past decade, technology is bringing increased simplicity and interconnectedness to consumers’ financial data. Today, many consumers throughout the world can connect their bank accounts, paychecks and other funds directly to merchant sites, subscription services, money transfer apps and other financial services to create a seamless flow of personal financial management. And the possibilities are growing.
Open banking could easily evolve into a financial and shopping ecosystem where “all the things that you would need at a moment’s notice are at your fingertips and seamlessly integrated,” Chris Skinner, CEO of The Finanser Ltd., explained in a recent interview.1
The Benefits Flow to the Consumer
Sparked by the fintech revolution of the 2010s, open banking seeks to provide a robust payment solution that allows financial institutions to share customer account information among various partners—with the customer’s consent. It is, in essence, “a way of giving customers more control of their financial data, more control of how they use their account and more control over which channels they use to manage their accounts,” according to The Payments Association.2
“Simply put, open banking is based on the idea that a customer’s financial data belongs to the customer,” said Leigh Garner, Head of Industry Relations at Discover® Global Network in London.
With open banking, consumers can effortlessly use a broad range of spending and payment tools in combination. Connecting various banking and payment card accounts via open banking can enable customized products, faster access to credit and financing and more control over personal finances. Many consumers are already enjoying its benefits as various financial services are being integrated—from person-to-person (P2P) payments to consumer-to-business payments and more—with their banking institutions, investment accounts and credit reporting agencies, among others.
In fact, rather than naming it “open banking,” which can suggest a lack of privacy for consumers, Skinner suggested that it would be more appropriately called “seamless banking.”
In some markets, open banking is also bridging the gap between merchant and consumer as an efficient and secure form of payments acceptance. Open banking “is integrated into my life, so I don’t have to think about which bank or service I’m using,” Skinner said.
Open Banking Goes Global
Spurred by regulatory actions such as those in the U.K. and the European Union’s Payment Services Directive Two (PSD2), the push for open banking was aimed at increasing competition by breaking the lock of traditional financial institutions’ control over consumer data. As part of the initiative, regulations required the industry to strengthen e-commerce security, market third-party access to consumers’ financial accounts and improve customer authentication.
Today, the push for open banking is global, and consumers are responding. The U.K., as a global leader, has witnessed a 60% increase in active open banking users3 as more than 5 million users in that country are already taking advantage of open banking.
In the U.S., the Financial Data Exchange (FDX) is seeking to create a standard for data sharing among financial services. Currently, it reports 32 million consumer accounts are using the FDX API to power open banking and open finance.4
In Australia, four of the country’s largest banks required data sharing, starting in July 2020.5 And with over 14,000 financial institutions in the U.S., the country is expected to become the next frontier for open banking as interest grows in innovative payment experiences.
Open Banking is the Gateway to Open Finance
The introduction of open banking is just the beginning, Skinner and others suggest, as it is creating substantial changes throughout the global financial journey. Open banking is quickly leading to a broader concept of “open finance,” which can connect an expanded array of consumer services with virtually any industry that delivers services to consumers.
“Over the next decade, you’ll start to see open finance starting to integrate open health, and open wealth, and open travel, and open retail and more services into a complete system,” said Skinner.
Importantly, these open financial services also promise to deliver new retail and financial opportunities in underserved communities by extending the flow of financial information among a larger pool of institutions. This interconnectedness can further inform credit scoring models to bring about more meaningful insight into lending decisions and expand the availability of credit.
Indeed, the move has the potential “to reshape financial services as we have known them, touching everything from the way large companies do business to retail, small and midsize enterprises and all aspects of personal finance and households, including mortgages and insurance.”9
Just how quickly these new capabilities reach various markets around the world, though, remains to be seen. As Leigh Garner at Discover observed: “The technical solutions are there, but often consumer adoption takes longer than anticipated.”