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Open Banking is disruptive and growing at an unprecedented pace. As of 2020, 24.7 million individuals worldwide used open banking services, a number that is forecast to reach 132.2 million by 2024.
A bit of history: The economic crisis (2007-2008) and the lost of trust in banks confirmed the need for a change. The EU adopted the proposal for the Payment Services Directive (PSD1) in 2007 to increase competition and choice for consumers in the financial sector. A second initiative was born in 2015 (PSD2) to improve the first initiated and create safer and more innovative payment services. PSD2 came into force in 2018. Under PSD2, AISP (Account Information Service Providers) and PISP (Paiement Initiation Service Providers) need to abide by the rule. Being an authorised AISP means that the business can ask for permission to connect to a bank account and use that bank account information to provide a service. Being an authorised PISP means that the business can ask for permission to connect to a bank account and initiate payments on the customer’s behalf, from their bank account.
How to link PSD2 and Open Banking then? Open banking is a term that was born when PSD2 came into play. It refers to making customer account information available to Third Party Providers (other banks, FinTechs, credit agencies, tech companies... either registered as AISP or as PISP) via APIs. This opens access to customers' consumer banking, transaction and other financial data. Uses can include: aggregating customers' accounts so that customers get an overview of their different accounts, comparing the customer's accounts and transaction history and provide them financial insights, allowing lenders to get a complete overview of applicants' credit history. The term "Open Banking" is actually going beyond the PSD2 scope and is as well the opportunity for Banks to go beyond the scope of the regulation only.
The promise behind Open Banking initiatives is to develop an ecosystem which is prone to generating business, solving needs, encouraging innovation and granting customers access to more and more financial choices.
Open Banking APIs not only satisfy and improve third party providers' revenue, they also give financial institutions a new way of increasing their digital revenue. Those can stay competitive by exploring data-sharing agreements with Fintech Companies and other Third Party Providers. Let's deep dive:
It may be compliance matters that pushed banks to invest in Open Banking. Yet, there is no doubt the initiative greatly benefits financial institutions.
For instance, from the beginning of the Open Banking API initiative, Citi has been connecting with many different players to better engage with customers. Such engagement led to better customer engagement. As an example, the bank partnered with Hong-Kong based e-commerce platform HKTVmall. On that e-commerce platform, customers can conveniently pay for their purchases at checkout using Citi reward points without leaving the digital platform. The experience is seamless.
Foreseeing huge opportunities, ABN AMRO is on the pursuit to open up valuable digital building blocks from their IT landscape. The bank has even released a clear pricing model for their Tikkie API. That API enables customers to generate payment requests for Business to Business (B2B) and Business to Consumer (B2C) propositions.
There are very different fields in which Fintech companies are benefiting from Open Banking APIs. Among them, a few examples:
Personal Finance Management - Smart Budgeting
Businesses can have access to users' bank accounts' transactions. Savings platform Plum offers financial insights and allows its users to set spending caps and receive recommendations on how to save money.
Account Aggregation
Ember makes accounting effortless for business owners. They grant business owners a central place for all of their business transactions: automating all of users' finances, accounting and tax.
Curve lets users connect their debit and credit cards. This way, a user never has to switch banks. All cards become contactless and work with Apple Pay, Google Pay and Samsung Pay.
Automated Accounting
Yappily allows businesses to seamlessly connect their banks with their accounting providers to get real-time cash flow visibility, streamline account reconciliation and manage invoice payments.
One-off payments
Coupay allows freelancers to collect payments from their customers in a few clicks.
With access to banking APIs, FinTechs increase their earnings and provide users with opportunities to enhance their financial & digital lives.
Open Banking APIs improve how appealing financial institutions/ applications are to customers. They are better able to satisfy the needs of existing customers and better able to attract new customers. Services can be centralized, customers can better transact, save, borrow, invest etc.
First, Open Banking APIs must be standardized to allow the greatest interactions between banks and Third Party Providers. Even if standardization initiatives have emerged (NextGenPSD2, Open Banking UK etc.), there is a risk of fragmentation of APIs.
There is also a challenge regarding liability relying on the handling of such huge volumes of data. The breadth and complexity in the open banking system involves many different interconnected players. Yet, the more players are added, the more the risk that scams gain access to customers' financial data increases. Where does liability fall in case of a data breach?
Finally, we'd highlight security, which is close from liability. Data needs to be secured at every stage: from gathering, to storage, transit and usage.
Open banking will add substantial value to all players, but only if regulated properly.
How to do so in the API world? A tool such as Blobr can help ensure the max has been done. Below's an overview of how:
Blobr grants access to features that make it easy to rapidly build an Open Banking implementation beyond PSD2. The platform is already in production for several Fintech companies sharing data with selected partners.
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