Opportunities and threats: the impact of Open Banking 

How Open Banking is disrupting traditional banking models and reshaping the competitive landscape.

On the face of it, regulatory and technical frameworks may not sound very exciting. And payment infrastructure perhaps even less so. But what if we were to talk about better bank payments, more joined-up money and personalized services?

Well, Open Banking is delivering on all this right now. That’s despite, or maybe even because of, the fact it’s a regulatory framework. And in some countries, a technical one, too.

Open Banking is creating new opportunities for banks, fintechs, retailers and end-users. But opportunities and threats exist in the same future, as we investigate below.

What is Open Banking, and where did it come from?

Open Banking describes a way of securely sharing data held by banks, if customers consent to this. Some countries mandate a standardized format for this data-sharing.

Introduced in the EU and UK in January 2018, Open Banking was originally a regulatory initiative. The aim was to improve competition in banking and payments by lowering barriers to entry for new entrants, such as fintechs, start-ups and tech companies.

These newcomers could leverage Open Banking APIs to offer innovative products and services. This in turn would challenge traditional banks, drive competition and innovation in the market and give end-customers more choice.

These themes are present in the PSD2, or ‘revised payment services directive’, the European legislation that brought Open Banking into existence as well as in the general data protection regulation, or GDPR.

It’s all part of a broader cultural change to view organizations as custodians of their customers’ data. And to enable customers to get more value out of their data. This is primarily by allowing authorized parties to access it. Or by enabling customers to aggregate their data from different sources for more value, as we describe in four use cases below.

1. Better bank payments 

Open Banking makes it possible for sellers to accept payment direct from customers’ local bank accounts quicker, easier and better than ever before. The potential reach is anyone with a bank account. So, thousands of customers and hundreds of participating banks across Europe and beyond.

Impact: Unlike traditional banking which relies on a chain of intermediaries to transfer funds cross-border, Open Banking is transfers without the middlemen. That translates into shorter routes, and quicker and cheaper payments, which brings opportunities for new entrants as well as disintermediation threats for incumbents and intermediaries.

2. Embedded finance

If businesses can connect customers to their money directly via their bank account, there’s scope for them to ‘embed’ financial services into their platforms and customer journeys. That’s even if they’re not a bank or payments company. And that’s hugely disruptive.

It includes Klarna-like buy-now-pay-later loans at point of purchase. Or insurance sold alongside mortgages, vehicles or even consumer devices. Financial services can also be embedded into marketplaces, accounting or ERP platforms, all of which is happening today.

A recent study reveals that UK retailers offering embedded finance have seen a 5-12% boost in conversion rates, a 15-30% increase in average order values and a 4-7% increase in incremental revenue.

Impact: The embedded finance opportunity for fintechs and non-financial brands to drive customer loyalty, growth and revenue are as big as the disintermediation threats for banks and payment card brands.

3. Financial management

Being able to aggregate data in real time means that customers can get a holistic overview of funds held across different providers. This enables them to evidence income, outgoings and affordability quicker and more easily when applying for a loan or mortgage. They can also actively monitor and control their finances better in one place.

Meanwhile providers can make quicker, more informed decisions to manage risk and to offer personalized lending products with better terms. They can collaborate better to create services that meet unique customer needs.

Impact: Providing a more joined-up view of money makes financial management easier. Plus, enables providers to tailor their products and services better, partnering more widely with third-party developers, fintechs and others to do so.

Open Banking is a way-stage to the future. The next logical step would be applying the same data-sharing principles to other areas of financial services. An Open Finance proposition including savings, insurance, mortgage and pensions would create an aggregated dashboard of a customer’s financial life. Open Data could expand the proposition further still to telecoms, utility, healthcare, retail and travel data.

4. Know your customer

Open Banking technology allows direct connection to customers’ bank accounts to verify accounts and identities, plus perform affordability checks.

Businesses, fintechs and public sector organizations can check that customer-supplied data matches that held by their banks. They have proof that workers have a bank account in their name to receive payment for gig, freelance or salaried work. And have evidence of their customers’ creditworthiness for loan, store card or mobile phone contract applications.

Impact: Knowing customers improves access to services and capital as well as management of risk and more.