Demystifying Open Banking: The Inevitable Future For Your Bank

Now more than ever, banks have a myriad of digital opportunities to explore a better banking future. Driven by growing consumer demands, increasing regulatory changes, and the proliferation of API integrations, Open Banking has proven to be a promising market for Financial Institutions (FIs) worldwide.

As an emerging practice for FIs to enable secure connectivity to third-party providers—and thus, extended access to their client data—Open Banking allows for improved financial experiences across retail and business consumers alike. By unlocking greater access to client data, banks can develop enhanced applications that simplify the process for consumers to access their bank accounts and for businesses to pay their vendors more quickly. One of the most popular use cases is the newly-found ease of opening bank accounts. Through APIs, the authentication process of opening new bank accounts is taken care of in a matter of minutes, delivering the speed and agility traditional systems have been unable to provide in the past.

The push for online banking tools and greater digitization is not just a pandemic trend; it has fundamentally changed consumer expectations and forced banks to meet them where they are.  As a result, FIs are now realizing that their clients do have access to a world where traditional institutions may not actually be a core part of the banking ecosystem—and that means your bank is going to need Open Banking to catch up.

Open Banking On A Global Scale

Banks around the world are accelerating their Open Banking initiatives in order to meet growing consumer expectations. Today, 87% of countries now have some form of open API activity, quickly making this banking practice a competitive necessity in the industry. From 2020 to 2021, there was a 17% jump in APIs offered per bank indicating that FIs are now leveraging these digital tools to cover more financial ground.

In 2018, the European regulation Payment Services Directive 2 (PSD2) mandated that banks open APIs and data sharing to other FIs and neo-banks as a way to encourage innovation in the financial sector. By allowing third-parties to access bank infrastructure, traditional institutions were forced (for the better) to invest in an API strategy that would help stimulate the financial economy. Three years later, large players like Barclays have successfully opened their APIs to third-parties to enhance the banking experiences they provide to their consumers. For example, Barclays users can now see and manage several bank accounts beyond their original institution in one interface: a single banking app. By the end of 2022, the European Economic Area (EEA) and the UK is expected to reach 7.1 billion monthly API calls, increasing by 137% since 2020.

PSD2 allows FinTechs and other financial service providers to offer their solutions through one of two designations: 

  1. AISP (Account Information Service Provider) - Businesses can access and view account data through an API connection with their bank
  2. PISP (Payment Initiation Service Provider) - Businesses can make payments on behalf of their customers

Despite the ongoing battle to standardize Open Banking regulation across North America, the accelerated shift to the digital space has put up a persuading argument in favour of the practice. In a 2021 research report by Mastercard, 90% of U.S. and Canadian banking consumers use online and/or mobile applications to manage their money. Additionally, 74% and 65% of these countries’ users, respectively, have already connected to or considered connecting their bank accounts to financial apps and services to automate their current banking processes.

In the U.S. particularly, Open Banking has largely remained a market-driven initiative. In lieu of government-backed regulations, market-based competitive forces have manifested a version of Open Banking on their own. Top-tier institutions have struck their own deals with FinTechs, such as J.P. Morgan Chase’s partnership with FISPAN, and Wells Fargo’s partnership with Xero and Finicity. Banks today understand that with the combination of customer demand, the pain of legacy systems, and the opportunity that connected banking presents, there’s great value to be seen by investing in Open Banking, even if it is only on a per bank basis (for now).

Why It’s Time To Jump On the Open Banking Wagon

The COVID-19 pandemic has accelerated digitization in the industry further, making accessible digital banking services no longer a good to have but a must. In 2020, only 45% of companies were satisfied with their banks’ payments and banking capabilities. With declining physical touchpoints and a rapid change to online servicing, consumers are quickly getting more accustomed to managing their finances online. While banks have found ways that are sufficient enough to retain some of their client base during the pandemic, they will also need to learn to continuously adapt to shifting customer expectations—because they are going to change.

Although Open Banking and APIs are meant to reduce the need for technical, in-house expertise and IT involvement, many financial institutions feel more than comfortable continuing on in their traditional and stagnant ways. However, when it comes to developing your own Open Banking strategy, this very concept should be viewed more as an opportunity than a threat; it’s a way to innovate to the benefit of both your bank and your most important clients.

By now, it’s safe to say that most executives have led, or plan to lead their companies onto the path of digitization. With digital adoption accelerating nearly five years ahead in only two months’ time, Open Banking is one of the most crucial ways to differentiate your bank from traditional and new competition. In PYMNTS Next-Gen Commercial Banking Tracker, in collaboration with FISPAN, approximately 67% of financial service leaders said they planned to invest in APIs in 2022. In another report, McKinsey reported just how much of a driver APIs are for new bank revenue: 90% of FIs use or plan to use API initiatives to generate additional revenue among current customers, while 75% are looking to the technology to bring in revenue streams from new customers.

To understand how Open Banking can truly impact a bank’s success, we can look at its wide adoption in Europe. Insider Intelligence projects that the revenue potential in the UK, generated by Open Banking, will enable small and medium-sized businesses (SMBs) and retail customer propositions to reach $2 billion by 2024—a 25% compound annual growth rate (CAGR). Banks in the region that also develop an API strategy and are ready to invest in new opportunities presented by Open Banking will generate up to:

  • 20% of the lending revenue pool
  • 21% of the account revenue pool
  • 17% of payments
  • 12% of retail investments

Save Your Breath; You Don’t Need to Build Your Own APIs

Banks can extend their API development beyond the minimum regulatory requirements to offer existing customers new services (such as single sign-on, pay with credit card rewards points, and credit drawdown), and export data to personal finance managers or small business accounting apps like Quickbooks and Acumatica. Banks can also sell their specialized services to other parties. For example, consumer credit check services to FinTechs, or identity management tools (like KYC) to smaller banks to enable their business.

However, it’s important to note that banks don’t have to go about building their own APIs or digital platforms to derive the efficiencies we’ve discussed about embracing Open Banking thus far. In fact, we don’t recommend it at all.

From chronic delays and strained resources to blown budgets and missed opportunities, banks have an endless amount of opportunities to look elsewhere for platform improvements. Where might this be? Through partnerships with innovative FinTechs and third-party financial providers who have the technology your clients are looking for—allowing you to diversify your risk and R&D, build meaningful relationships, and focus your time on creating top-tier consumer banking experiences.

Final Thoughts on Open Banking

Open Banking may seem intimidating to take on at face value, but it really is just the idea of driving innovation through collaboration. As markets digitize and new unicorn companies like Uber and Shopify emerge (that focus on catering towards convenience in the user experience), the need for the financial industry to digitize increases tenfold. At this critical point in time for financial services, banks will need to choose between defending their ownership of tools and financial data, or taking on a different role in a new network of partners in the evolving banking ecosystem. For the latter, banks will ultimately need to realize that in order to capitalize on the Open Banking opportunity just under their noses, banks, FinTechs, third-party aggregators, regulators, and tech companies are all important stakeholders who will need to engage and share their learning as they embark on this journey together.

So, as Open Banking continues to prevail as a way for challenger banks to develop a foothold in the industry, does your bank plan to join the innovator league or wait until your competitors eat into your profits? 

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Check out our blog post, "What Open Banking Actually Means For Your Bank," to learn all you need to know about Open Banking; from its impact on customer experience and financial inclusion, to how your bank can prepare for the future.

To find out how FinTechs like FISPAN can help your bank get ahead of the Open Banking trend, schedule a demo with us here.

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