Open Banking is a new revenue stream for banks. UK and Europe were the early adopters of open banking. Banks such as N26, Revolut are a few great examples who have redefined banking models.
Open banking sources various technologies, regulations, and services to create unique banking experience. The entire data exchange between banks and their end consumers is facilitated through secured Open API’s.
This article dwells deeper in this subject and examines the current outlook of Open Banking in Europe, its adoption and a few use cases. Let us start with some of the tangible benefits of Open Banking
How are end-consumers getting benefitted with Open Banking?
Open banking comes with a lot of benefits for the fintech companies and end-consumers alike. We’ll examine some of the benefits for the end-consumers below.
Banking as a Platform
Banking as a platform encourages a customer-centric approach to providing financial services, giving customers more power. This way, banks can build on the existing relationships with their customers to offer personalized finance tools, marketplaces, and spending trends that can help customers save more money.
With the prevalence of open banking, it is no longer compulsory for customers to visit the banks to complete transactions. Open banking has effectively removed the bank as part of the customer journey, and the bank is increasingly seen as a service rather than an institution. Also, COVID-19 has played a significant factor in this, and it has become more inconvenient to go to the bank physically. Apart from convenience, handling banking transactions at home is a necessity for their health.
Better Finance Planning
Customers can better manage and plan their finances with services and planners independent of the bank for their benefit. Previously, the customer would need to do a lot of work to gather the necessary information from their respective banks. Today, all they need is to give their service provider permission to access their data through their bank’s API. All of the processes for applying for mortgages and analysis are easier with this model.
Open banking has led to new services for customers and easier ways for carrying out transactions. There are now easier ways for sending and receiving direct deposits like PayPal. There are no other alternatives for the debit and cash card like the Apple account that works similarly. Services like Klarna help you make installment payments on products instead of using a credit card. More than that, removing the need to visit a physical branch and logging into bank accounts isn’t necessary.
How it is rising competition among European banks against disruptive Fintechs?
Many financial regulators in different regions are taking steps to implement open banking systems, fostering market competition but still ensuring consumer security. This change will continue to increase all over the world. This change will increase competition among banks, fintech, and even third-party providers by developing a platform of regulated access to data with modern API-geared technology.
Payment Services Directive (PSD2)
In Europe, the revised version of the payment services directive (PSD2) has laid the foundation for open banking implementation. The PSD2 amends the former regulatory predecessor that was initially concerned with developing single payments in the EU. Since implementing the PSD2, there had been a significant increase in development in the industry as it made it mandatory for banks to share customer’s financial data with third-party service providers.
In the regulation, the Access to Account (XS2A) service made it compulsory for all banks to give the authorized account information service providers (AISPs) and Payment Initiation Service Providers (PISPs) secure and controlled access to customer’s account data. The PSD2 is an excellent example of how open banking regulations and methods foster competition between European banks and disruptive Fintechs.
EU V/s UK Adoption in Open Banking
We’ll compare the adoption of open banking in the EU and UK through some standard headings.
In this regard, the differences are glaring without any doubt. Many European countries are just adopting the open banking system, and many of them are through fintech product launches. A great example is TrueLayer and Revolut that took open banking to four European countries in about six months, increasing the adoption rate. In the UK, this is different as there is already a mass adoption of open banking on a large scale, with many European countries hoping to get to the adoption level of the UK.
Open Banking Spend
The spending on open banking directly correlates with the adoption level as the UK has seen a lot of money go into open banking research and implementation. It also doesn’t seem to be on the decline anytime soon as almost 3 in every 4 UK financial institutions are increasing their spending on open banking. This is comparable to Europe, where only 61% of firms are spending money on open banking.
Perception of Open Banking
When open banking came to the world stage, the UK was more open to accepting it, which shaped the public’s perception of it. Also, the regulatory landscape in the UK was far more forgiving than the rest of Europe, which made it get more embraced in the UK quicker. Yolt Technology Services was the first third-party provider to create an open banking APU under the Payment Services Directive (PSD2). It is a London-based firm, and this also propelled the use of open banking in the UK.
Future of Open banking – A Few Use Cases
Open banking has shown applications in other areas beyond financials and banking. Here are a few use cases that show what the future of open banking has in store:
Finding Suitable Apartments
Some of the most important factors in finding an apartment are location, infrastructure, and price. Real estate companies with extensive databases charge high commissions so individuals typically resort to social media, social community platforms, and local ad-powered platforms.
Open banking can change the entire landscape with apps that can help secure service providers connect with customers based on their spending preferences. Consumer data can give insights into the several factors that sustain their lifestyle including schools, medical facilities, transportation, restaurants, and more. Services can use this data to predict customer’s needs more accurately.
Improving Wage Transparency
A use case that still needs a lot of research is its ability to address wage transparency. Account data can give working professionals with insights they need to survive in the global workforce. This information can help them address wage inequality, employee rights, or demand for promotions when due.
These apps have the capacity of aggregating the mean salaries of professionals in the same field and customers can compare with their colleagues. Even though companies put a lot of effort into concealing their employees’ salaries, this has proven to be a counterproductive effort. Research has shown that disclosing wage statistics can expose the difference in gender compensation and help reduce the pay gap greatly.
Traveling without a passport
Travelling usually involves long queues for passport checks and verification. However, this is poised to change as different bodies are considering a program that will allow passengers to fly between international destinations without any documents. Passengers would use their mobile phones to verify their identity as opposed to using a passport.
Open banking can be of great help to this initiative, and it can help in travel identity verification. The documents needed to open and operate a bank account needs the same type of travel documentation. Open APIs can help digital identity providers get their customers’ identities through their banking platform quickly and securely.
Open banking is going to shape banking development in the next couple of years and there is an increase in innovation to developing better systems in this field. It is expected that competition will become fiercer than now in the banking space leading to a reshaping of the entire sector.
One thing is for sure though, any side that adopts this model and puts customers first in line with using technology to provide quality service will remain relevant in the coming years.