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Open Banking Innovations - A Global Outlook

Featured in the World Leasing Yearbook 2022
By Peter Minshall, Executive Vice President, NETSOL Technologies, North America on 06-02-2022

Innovations in financial technology are fundamentally changing ways for both banking and non-banking financial institutions. Consumers present a new challenge for banks - they nowadays have a thorough understanding of the value of their data and the importance of keeping it safe. Just as banks have been the safest place to keep their money for hundreds of years, now they need to become the safest place for consumer data. As a result, banks have been forced to re-evaluate their customer relationship and product offerings from their legacy systems simply to stay relevant with FinTech offers in the market.

FinTech has also stepped in to provide alternative funding products to fill gaps in the financial system, from which banks have traditionally stayed away. Now is the time to seize the digital opportunity to revamp the financial ecosystem, and so, with the right technology infrastructure, financial institutions can build speed, efficiency and above all, greater customer focus and a much better financial model for the future.

Until a few years ago, organisations including financial services went at lengths to ensure customer data is kept secured within the organisation; however, this is changing now. The world is moving towards an open data economy and the debate over who controls the data is shifting in favour of the customers. As far as financial services industry is concerned, this shift is being brought on majorly through the introduction of open banking.

Open banking is perhaps one of the most transformative trends in the financial services industry today, being poised to change how traditional retail banking is done. The global open banking market accumulated to US$7,295m in 2018, expected to reach US$43,152m by 2026 with a CAGR of 24.4% from 2019 to 2026.

Open banking enables seamless transmission of data between financial services companies and other institutions. This sharing of date is done through standard technology called open Application Programming Interfaces (APIs). These APIs act as a software intermediary enabling swift communication and data sharing between applications. Financial institutions grant third-party service providers access to consumer data subject to consent from consumers. After the consent from customers is obtained, third-party service providers can utilise consumer data for a variety of services ranging from credit evaluation to recommendation of products and services and more.

Benefits of Open Banking

Although open banking is still in its infancy, its evolution is expected to accelerate and become more meaningful and beneficial for all stakeholders including consumers, banks and other third-party FinTech service providers.

To begin with, open banking puts consumers back in power to control their data. If consumers opt to benefit from open banking, they may get access to personalised products and services resulting in improved customer experience with the financial institution.

In a 2020 global banking survey conducted by The Economist Intelligence Unit (EIU), it was observed that giving customers the option to connect their bank data with third-party providers among open bank initiatives was the second most chosen innovation strategy by respondents. Another way customers can benefit from open banking is through the additional transparency it offers.

For banks and other financial institutions, open banking will allow them to rethink their business models to remain relevant with the market and gain better and deep insights into their customers through access to meaningful data enabling them to offer more agile customer services and offer service personalisation to their customers.

Through open banking, financial institutions can ensure seamless connectivity with a host of available APIs. This allows them to not only enhance their current service offerings but also introduce new ones. One such example is Experian Connect API which allows financial institutions to embed credit functionality on their websites and mobile apps giving end customers real-time access to their credit scores. Integration of such APIs to improve service offering eventually improves customer engagement and helps financial institutions to retain their customers better.

Open banking also opens new avenues for start-ups and other FinTech companies in the financial services industry through collaboration with banks and other financial institutions.

Challenges Facing Open Banking

As much traction as open banking is gaining, it doesn't come without certain challenges. The biggest challenge facing open banking is security. Sharing of sensitive consumer data with third parties is a huge concern for financial institutions. Not all FinTech companies are tech giants and can lack the capability to provide the required security protocols, making data vulnerable to external threats including privacy breaches, fraud and cybercrimes.

Giving external service providers access to banking systems increases risks of compromising sensitive data to hackers, which is why it is pertinent for financial institutions to maintain enterprise-level security standards to ensure their data remains secure. Moreover, open banking is relatively still a new concept and there is still a lack of awareness among the general population. Since it relies heavily on consumer consent, many people are still reluctant to agree to their data being shared with third parties. It will certainly be some time before there is a widespread acceptance of open banking.

Another challenge is the reliance of open banking on APIs provided by third-party service providers. On the one hand, this external collaboration enables integration with diverse services, but on the other, it becomes a challenge to ensure the stability of APIs. If stability is not ensured, it can have a direct impact on consumer satisfaction. In November 2020, there were more than 5.7 million failed API calls in the UK according to statistics by Open Banking Implementation Entity (OBIE).

As open banking adoption is increasing, the challenge of regulation is also increasing. The solution to this challenge directly depends on how governments across the world view open banking. For example, open banking is being monitored by the financial services companies themselves in the US. Even though there are open banking guidelines available, US regulators haven't so far imposed strict rules.

Open Banking in the US Compared to Rest of the World

The world is fast moving towards adoption of open banking and the rate of adoption is likely to accelerate further in coming years. Some notable examples of FinTechs benefitting the market include new lending formats like Lending Club in the United States, M-Shwari in Africa and Lenddo in the Philippines, and payments disruptors like Stripe and Braintree. According to Forbes, up to 87% of countries are offering open banking in one form or another.

Countries like Australia and United Kingdom are frontrunners in accepting the importance of an open data revolution and taking it a step further by devising and implementing regulations such as Australia's Consumer Data Right Act, and UK's Open Banking Standard and PSD2 which requires banks to share consumer data with third-party service providers subject to consumer consent. Implementation of these regulations mean banks can no longer deny consumers the ability to share their financial data with other institutions should they wish for it. As a result, according to the Open Banking Implementation Entity (OBIE), open banking usage saw it double in 2020 with open banking technology powering six billion calls through FinTech APIs and more than four million consumer transactions.

The Canadian finance ministry has set 2023 as an ambitious but achievable target for its launch of an open banking system. Mexico and Brazil have already launched their open banking regulations in 2018 and 2020 respectively. Likewise, countries in Asia including Japan, Hong Kong and India have started implementing open banking laws.

Compared to these countries, the adoption of open banking in the US market is still a little behind. A survey by Go Cardless found more than half of Americans have no knowledge about open banking at all. According to a survey conducted by Deloitte, it was observed that compared to older people, younger generation found open banking more valuable. This inclination of Gen Z and Millennials towards open banking was due to increased convenience, flexibility and transparency being offered by its adoption.

However, a recent executive order issued by President Joe Biden on the promotion of competition in the American economy, clearly puts open banking in a new focus. The Consumer Financial Protection Bureau (CFPB) will consider devising regulations in support of open banking to empower consumers to switch between financial institutions with ease, and benefit from innovative financial products.13 With such open banking initiatives being taken, the US is now becoming one of over 40 governments globally to implement open banking at some level.

Future Outlook

It is beyond doubt that open banking is here to stay. From the two key impacts of firstly with the efforts being underway to create regulations, and secondly the inclination of younger, digitally native generation towards its adoption, open banking initiatives will take more prominence in coming years. All stakeholders including consumers and FinTech services providers are going to benefit from it but above all, if banks choose to be the forerunners in adoption, they will be the ones with the most advantage to gain. As open banking become mature, the resulting benefits will also increase exponentially.

Despite all of this, the challenges and implications of open banking need to be (continually) addressed. There need to be regulations with strict implementation of rules and policies, API infrastructure needs to be standardised, financial institutions need to put open banking at the heart of their roadmap strategy and most importantly, consumer data protection needs to be ensured at all costs for it to succeed.

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Written By:
Peter Minshall, Executive Vice President, NETSOL Technologies, North America

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