Open Finance, also known as open bank data, is a new practice that provides consumers with additional value propositions. Open Finance allows an expanding universe of new entrants to access consumer data and secure new accounts to offer new products and services. Financial technology (fintech) companies, such as Neobanks, are well prepared to take on a stake in this new market. Banks that are lagging in the open data economy are in essence yielding the market to these new competitors. Open Finance is driving innovation in the banking industry and is ushering in a new era of groundbreaking financial products and services that will make it difficult for banks that are straggling. Historically, banks have controlled the complete value chain including consumer spending, savings and borrowing. As fintech players embed new financial products through Open Finance they are facilitating the exchange and sharing of customer or commercial financial data with third parties. The use of application programming interfaces (APIs)is allowing for greater visibility of accounts activity and more expedient access to payments, transactions, identification of preferred financial products and other services. Third-party offers and innovations in the financial space are reshaping the consumer engagement, bank accounts, credit cards, payments, mortgages, small business loans, as well as insurance policies.
Open Finance is growing globally
Europe and China are pioneering Open Finance while the United States and Canada are moving more slowly towards Open Finance. Data privacy and regulatory concerns are at the centre of the dialogue. In Europe, it is reported that the rapid growth of third-party providers (aka TPPs), grew from about 100 to more than 450 in just under two years. During that time, their focus has expanded from payments to include the entire financial value chain. All this activity is slowly blurring the lines between industries.
As Open Finance continues to grow and regulations mature, it will, change banking as we know it today, and bring about new competitive pressures on incumbents, while unlocking a wave of digital financial disruption and enabling the formation of the open data economy.
Open Finance is driven by demands from consumers and small businesses
The need for more choices, better products solution, ease of access, and flexible options for money management makes Open Finance attractive to consumers. As the practice continues to grow from centralization to networks, it is likely that a bank’s role may transition over time into a utility provider or infrastructure, upon which third-party players control the customer-facing offers. This should be of concern in some markets to banks that may be complacent about the threat posed by Open Finance to traditional centralized business models and, drive them toward new partnerships and investment to expand their digital customer experiences. According to a McKinsey.com article (“Financial services unchained: The ongoing rise of open financial data”) dated December 17, 2020 “55 percent of US consumers use fintech solutions, with many (44 percent) having at least two accounts.” Today’s Banks need a more agile approach to introduce new offerings that can better serve the financial products and services needs of the customer.
Key Takeaways on Open Finance
New consumer digital habits, choice, greater levels of convenience are driving the move toward online channels.
The world of banking is changing in part driven by innovative technologies such as application interfaces (APIs) and the consumer needs for greater flexibility and “openness” allowing for networking of accounts and data across financial institutions, and third-party service providers for use by consumers. Though there are benefits Open Finance with its likely gains also raises the potential for risks to consumers as their data is shared more broadly.
Open Finance is steadily expanding in different markets globally and is poised to reshape the banking industry. Laggard institutions will be left behind.
Tomorrow’s Bank leaders need to pay greater attention to data, command of analytics and to form agile partnerships.
Open Finance is placing innovative non-bank companies in strong positions to become financial-services players.