• Appetite for “Open Banking”, where consumers allow third-party providers to use the financial information held by their bank to inform new products, is growing;
  • Progress in the sector differs by region, but demand for and use of Open Banking services has been further expedited by the COVID-19 pandemic;
  • To make Open Banking successful and sustainable, however, more banks need to embrace an end-to-end digital architecture.

In recent years, technology has facilitated a progressive opening up of the banking industry. It has ushered in an era of collaboration not just competition between incumbent banks and fintech.

This creates big opportunities to make banking better, in particular, tailored, personalized solutions for every area of money management. This includes, as society recovers from the coronavirus pandemic, fraud prevention for the vulnerable; as well as help for those with an unpredictable income in managing their finances and getting a mortgage.

One of the critical drivers of this change is “Open Banking”, where consumers allow third-party providers to use the financial information held by their bank to inform new products and services using technology known as Application Programming Interfaces (APIs).

The first concrete steps took place in the late 2010s, with the UK’s Open Banking Initiative and the EU’s Payment Services Directive (PSD2) coming in 2018. A few years on and with the widespread impact of the coronavirus pandemic, now is a good time to reflect on the extent Open Banking has taken hold.

A new report from Tenemos in partnership with the Economist Intelligence Unit (EIU) sheds some light on our progress towards Open Banking, with four important conclusions:

1. The appetite is there

Innovation is imperative for today’s banks. They face intense cost pressures, fierce competition and soaring customer expectations. Only through offering customers new and differentiated products, services and experiences can they rise to these challenges. Open Banking is an opportunity to do just that.

More than half of those surveyed for our 2020 report were C-suite; Open Banking initiatives were cited by 29% of respondents as their chosen innovation strategy. Furthermore, 45% of executives said they want their banks to become "digital ecosystems", for which Open Banking is critical. An example is a Nordic bank, Nordea – an early mover and one of the most prominent players in the Open Banking space. It recently partnered with fintech Tink to give its customers a comprehensive view of all their finances, including mortgages, savings, loans and current accounts – even from other banks.

How Open Banking is growing as a digital business model
How Open Banking is growing as a digital business model
Image: Economist Intelligence Unit (EIU)

2. Progress differs by region

The UK is recognized as a leader in Open Banking. It has taken a regulatory-driven approach, setting early deadlines for its biggest banks to build the infrastructure needed. The UK’s nine largest banks also funded a central programme and platform, the Open Banking Implementation Entity (OBIE), that cost at least £60m. In its latest annual report, the OBIE notes more than 3 million users of the UK’s Open Banking system with more than 700 companies either already involved or in the pipeline.

The European Union’s Open Banking approach is also focused on regulation in the form of PSD2. However, while this dictates that banks must create the APIs to interact with third parties, there is no specific guidance on how to do it. As a result, Open Banking has worked well in some EU countries. An example is in Belgium, where KBC has launched a multi-bank app, integrating with partners like PayPal. Some member states have further to go and Open Banking has run into challenges across EU borders.

Progress with Open Banking differs by region
Progress with Open Banking differs by region
Image: Economist Intelligence Unit (EIU)

Open Banking in Asia Pacific is at an earlier stage and has, so far, been driven by market forces. However, many Asian countries such as Singapore and Hong Kong are now prioritizing Open Banking. A relatively greater willingness by individuals in Asia to share their data should see rapid growth in the coming months and years. Australia, meanwhile, has introduced a new Consumer Data Right that should pave the way for it to become a leader in Open Banking in the Asia Pacific region.

In the US, many banks collaborate with fintechs like Plaid, PayPal, Intuit and Zelle. Regulators have taken a relatively hands-off approach compared to Europe, allowing the industry to plot the way forward on standardization. Various initiatives, such as the Financial Data Exchange, aim to standardize Open Banking practices. States such as California, New York and Virginia have brought in data privacy laws. These are seen as a prerequisite for Open Banking.

3. COVID-19 and beyond

The coronavirus pandemic has expedited digital transformation in banking by years. Consumers are now less likely to use branches or cash and more likely to embrace digital channels. This will become a lasting trend.

The pandemic has given Open Banking a powerful boost. The user base of the UK’s Open Banking platform doubled between April and September 2020. Meanwhile, research between the OBIE and Ipsos MORI showed that 50% of SMEs surveyed had begun using Open Banking since the start of the pandemic.

The UK leads the way on Open Banking
The UK leads the way on Open Banking
Image: Economist Intelligence Unit (EIU)

Consumers also show an appetite for Open Banking to go further. This includes making it easier to view recurring subscriptions, bring together information on pensions, allow the immediate transfer of money between accounts in different banks and help increase understanding of spending by grouping expenses into buckets.

4. Digital technology is critical to future success

Our report with the EIU found that 87% of countries have some form of Open APIs in place. The building blocks are there, but Open Banking can only be successful and sustainable if it has consumer confidence.

Consumers must see a clear benefit from sharing their data. This means differentiated, tailored products; it also means stable, reliable systems that are capable of handling steep increases in demand and delivering rapid service as open banking takes off.

The complex, legacy IT systems that many banks are still using cannot deliver this confidence. They have high operational risk, meaning new services cannot be delivered seamlessly. They don’t have the capabilities to create and launch products quickly, and they can’t innovate and create tailored, hyper-personalized experiences.

For Open Banking to succeed, banks must embrace an end-to-end digital architecture.

This requires modern banking platforms that are:

  • Based on Open APIs: the only way that banks can collaborate with third-party providers to create value;
  • Driven by AI analytics: this allows data to be easily processable by third-party providers. It also means banks can use the data internally and gain high-quality insights for better service personalization. This was a top priority for nearly a third (32%) of respondents in the EIU’s survey.
  • Elastically scalable: advanced technologies, like the Cloud, are able to cope with rapidly rising and highly variable use;
  • Highly secure: banks’ platforms must have the highest standards of security. This includes areas like authentication, authorization and access control.

Revolution or evolution?

Such fundamental change will take time to fully evolve on a global scale, but there is no doubt the trend is speeding up – even more so because of the coronavirus pandemic. With advanced banking technology, Open Banking is on course to be truly revolutionary for banks, their fintech partners and billions of banking customers worldwide.