Open Banking: Past, Present, and Future

September 17 , 2020

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Open banking, a phenomenon that has grown in relevance across the global financial services ecosystem, is not new. In fact, the inception of open banking stems back to 1983, where the Deutsche Bundespost, a German state-run postal service and telecommunications business, piloted a program with a select group of consumers. The program enabled them to initiate money transfers via telephone from the comfort of their homes, greatly improving the banking experience

Open banking has made significant advancements since then, but the intent remains the same. Non-banks are continuously innovating in an effort to democratize financial services and drive efficiencies for consumers, financial institutions, businesses, FinTechs, and regulators alike.

So what exactly is open banking and how did we get here? 

What is open banking?

In its current form, open banking allows third parties to access consumer banking data via Application Programming Interfaces (APIs) to develop new applications and provide better services to consumers. There are several market drivers that have accelerated this innovation across countless use cases. In fact, many of you likely use products or services on a daily basis that are enabled by open banking without even realizing it.

How does open banking work?

Providing third parties access to consumer banking data, with consumer permission, is a far safer and more secure method of exposing data relative to historical iterations. Prior to open banking, sharing consumer banking data was typically done via screen-scraping, a much higher risk method that leaves customers’ personally identifiable information (PII) susceptible to fraudulent actors. As a result, open banking enables greater privacy and security for both financial institutions and consumers.

Open banking on the rise

There are several trends that have enabled the rapid shift and acceptance of open banking. These trends include:

Evolving customer expectations: The ‘Amazon Effect’ has drastically changed the expectations that consumers demand when it comes to accessibility, speed, and convenience. The ongoing digitization of all industries, including financial services, has only been exacerbated by the existing COVID-19 environment.

Prevalence of FinTechs: Technology companies that want to simplify and provide greater transparency in financial services are constantly emerging. This too has been accelerated by the current pandemic - Robinhood’s remarkable growth as of late is a prime example of this.

Shifting regulatory environment: The landmark PSD2 legislation in Europe has required banks to share permissible consumer financial data with non-banks. The innovation and competition inspired by this directive has been echoed across the globe.

How are consumers using open banking?

Open banking is playing an increasingly important role in the daily lives of consumers. Open banking examples include:

Aggregation services: Consumers have more than five bank accounts, on average. This causes friction in understanding one’s holistic financial well-being. Aggregation services like Mint enable consumers to better budget and manage personal finances all in one place.

Payments: Venmo, the digital wallet service owned by PayPal with more than $37 billion in annual net payment volume and approximately 40 million users, enables consumers to seamlessly transfer money from one another. Plaid, the API software acquired by Visa for $5.3 billion in January 2020, enables third parties like Venmo to connect to bank accounts.

Wealth management: Managing investments can be daunting, time-consuming, and complex. A recent Charles Schwab survey revealed nearly 60% of Americans will use a robo advisor by 2025. In fact, the same survey reveals consumers are more receptive to automating their personal finances then they are automating food delivery, diagnosing minor health issues, driving vehicles, and even finding a date. Robo-advisors provide automated and algorithm-driven investment services with limited human touch. These modern money wizards are made possible by open banking.

We have only begun to scratch the surface of use cases enabled by open banking. It is clear that the impact stretches far beyond an improved digital experience and personalized financial products extended to consumers. Additional beneficiaries of open banking include:

Banks: Despite the potential competitive threats posed by emerging FinTechs, open banking is here to stay. Banks must embrace these tools to provide better user experiences to customers. Personalized data insights provided by FinTechs can help grow bank market share and build brand loyalty. Additionally, the ability to offer services not previously possible without open banking may enable financial institutions to identify unique and diversified revenue streams.

Businesses: With greater visibility into customer spending habits, companies have the ability to offer more personalized shopping experiences and promotional offers to consumers. They also have the ability to create efficiencies in their day-to-day financial operations and cash flow management through the use of open banking technology.

Regulators: Through the use of artificial intelligence, machine learning, and advanced analytics, regulatory bodies have a unique opportunity to automate cumbersome and manual compliance tasks.

Open banking trends

Open banking has been rapidly adopted across the globe, and interestingly, this adoption has varied across geographies. This innovation includes:

  • Groundbreaking M&A activity between the major card networks and financial data aggregation companies in the United States
  • Increasing prominence of challenger banks in Europe
  • Underwriting via alternative data sources in Africa
  • Emerging digital finance ecosystems in China
  • Mobile wallet growth in Southern Asia

These macro trends are just a few of the many emerging in financial services, and will undoubtedly be thought-provoking to assess how receptive different geographies are as these begin to take shape globally.

blog-open-banking-b@2x

What are the risks of open banking? 

While the benefits and value of open banking is evident for all parties in the financial services ecosystem, the technology advancements do not come without risks. A recent PEW survey revealed that 70% of U.S. adults feel their personal information is less secure than it was five years ago. There are some significant and legitimate concerns around financial privacy and how consumer data is used and monetized. There are also non-trivial risks and costs banks will incur due to the increasing prevalence of open banking. 

Robust internal cybersecurity protocols are no longer enough. Banks must have the infrastructure and capabilities in place to identify partner API vulnerabilities and ensure these third parties are acting in the best interest of their customers. Additionally, despite the “Amazon Effect” that has altered consumers’ digital expectations, 86% of consumers still value security over convenience in digital channels - another factor banks must contend with as they think about digital investments.

What’s next?

The one thing all can agree on, however, is that open banking has permanently changed the financial services landscape. While there are compelling arguments for both the convenience and personalization open banking can provide, there are security threats and data privacy concerns that may not have previously existed without it. 

The open banking era shows the importance of pairing secure infrastructure with consumer trust and privacy. Amount makes digital financial experiences that align with the way we live. The Amount platform empowers your financial institution to modernize your user experience, streamline workflows, and optimize your growth – all in a fraction of the time with no disruption. Amount’s profit-proven enterprise framework centers the experiences around your user so you can focus on what matters most – enabling secure growth and delighting your customers.

LEARN MORE

Footnotes

The information in this post is provided for informational and advertising purposes only. Amount's service may vary for each customer. For more information, email us – media@amount.com.

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Ryan Prince

Ryan Prince is a Business Development Associate at Amount, focusing on sales strategy and strategic partnerships. With a background in finance and technology, Ryan believes that the core strengths agile FinTechs possess in creating seamless digital experiences combined with the deep risk management experience and cost of capital advantage that financial institutions maintain as critical to winning customers in the next generation of financial services.

Open Banking: Past, Present, and Future

Posted by Ryan Prince on September 17 , 2020
Ryan Prince
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Open Banking: Past, Present, and Future

Open banking, a phenomenon that has grown in relevance across the global financial services ecosystem, is not new. In fact, the inception of open banking stems back to 1983, where the Deutsche Bundespost, a German state-run postal service and telecommunications business, piloted a program with a select group of consumers. The program enabled them to initiate money transfers via telephone from the comfort of their homes, greatly improving the banking experience.

Open banking has made significant advancements since then, but the intent remains the same. Non-banks are continuously innovating in an effort to democratize financial services and drive efficiencies for consumers, financial institutions, businesses, FinTechs, and regulators alike.

So what exactly is open banking and how did we get here?

What is open banking?

In its current form, open banking allows third parties to access consumer banking data via Application Programming Interfaces (APIs) to develop new applications and provide better services to consumers. There are several market drivers that have accelerated this innovation across countless use cases. In fact, many of you likely use products or services on a daily basis that are enabled by open banking without even realizing it.

How does open banking work?

By opening data access in a safe and secure way via APIs, open banking enables the ability to process large and small amounts of data across multiple parties in a secure way. The speed and security of open banking is crucial for banks to center the user experience around the needs of the modern consumer. Previous iterations of exposing this data left banks and their customers’ personally identifiable information (PII) susceptible to fraudulent actors. Open banking enables safe-and-secure data transfer to ensure the privacy of the financial institution and its customers.

Open banking on the rise

There are several trends that have enabled the rapid shift and acceptance of open banking. These trends include:

  • Evolving customer expectations: The ‘Amazon Effect’ has drastically changed the expectations that consumers demand when it comes to accessibility, speed, and convenience. The ongoing digitization of all industries, including financial services, has only been exacerbated by the existing COVID-19 environment.
  • Prevalence of FinTechs: Technology companies that want to simplify and provide greater transparency in financial services are constantly emerging. This too has been accelerated by the current pandemic - Robinhood’s remarkable growth as of late is a prime example of this.
  • Shifting regulatory environment: The landmark PSD2 legislation in Europe has required banks to share permissible consumer financial data with non-banks. The innovation and competition inspired by this directive has been echoed across the globe.

How consumers are using open banking

Open banking is playing an increasingly important role in the daily lives of consumers. Open banking examples include:

  • Aggregation services: Consumers have more than five bank accounts, on average. This causes friction in understanding one’s holistic financial well-being. Aggregation services like Mint enable consumers to better budget and manage personal finances all in one place.
  • Payments: Venmo, the digital wallet service owned by PayPal with more than $37 billion in annual net payment volume and approximately 40 million users, enables consumers to seamlessly transfer money from one another. Plaid, the API software acquired by Visa for $5.3 billion in January 2020, enables third parties like Venmo to connect to bank accounts.
  • Wealth management: Managing investments can be daunting, time-consuming, and complex. A recent Charles Schwab survey revealed nearly 60% of Americans will use a robo advisor by 2025. In fact, the same survey reveals consumers are more receptive to automating their personal finances then they are automating food delivery, diagnosing minor health issues, driving vehicles, and even finding a date. Robo-advisors provide automated and algorithm-driven investment services with limited human touch. These modern money wizards are made possible by open banking.

We have only begun to scratch the surface of use cases enabled by open banking. It is clear that the impact stretches far beyond an improved digital experience and personalized financial products extended to consumers. Additional beneficiaries of open banking include:

  • Banks: Despite the potential competitive threats posed by emerging FinTechs, open banking is here to stay. Banks must embrace these tools to provide better experiences to customers. Personalized data insights provided by FinTechs can help grow bank market share and build brand loyalty. Additionally, the ability to offer services not previously possible without open banking may enable financial institutions to identify unique and diversified revenue streams.
  • Businesses: With greater visibility into customer spending habits, companies have the ability to offer more personalized shopping experiences and promotional offers to consumers. They also have the ability to create efficiencies in their day-to-day financial operations and cash flow management through the use of open banking technology.
  • Regulators: Through the use of artificial intelligence, machine learning, and advanced analytics, regulatory bodies have a unique opportunity to automate cumbersome and manual compliance tasks.

Open banking trends

Open banking has been rapidly adopted across the globe, and interestingly, this adoption has varied across geographies. The chart below highlights some of this innovation, which includes:

  • Groundbreaking M&A activity between the major card networks and financial data aggregation companies in the United States
  • Increasing prominence of challenger banks in Europe (but they may not be here to stay…)
  • Underwriting via alternative data sources in Africa
  • Emerging digital finance ecosystems in China
  • Mobile wallet growth in Southern Asia

These macro trends are just a few of the many emerging in financial services, and will undoubtedly be thought-provoking to assess how receptive different geographies are as these begin to take shape globally.

IMAGE

What are the risks of open banking?

While the benefits and value of open banking is evident for all parties in the financial services ecosystem, the technology advancements do not come without risks. A recent PEW survey revealed that 70% of U.S. adults feel their personal information is less secure than it was five years ago. There are some significant and legitimate concerns around financial privacy and how consumer data is used and monetized. There are also non-trivial risks and costs banks will incur due to the increasing prevalence of open banking.

Robust internal cybersecurity protocols are no longer enough. Banks must have the infrastructure and capabilities in place to identify partner API vulnerabilities and ensure these third parties are acting in the best interest of their customers. Additionally, despite the “Amazon Effect” that has altered consumers’ digital expectations, 86% of consumers still value security over convenience in digital channels - another factor banks must contend with as they think about digital investments.

What’s next?

In this year alone, we have seen increasing consolidation and acquisitive activity between financial services giants and nimble FinTech firms. This increased adoption of services that are empowered by open banking can lead to cataclysmic data breaches and security threats that we far too often hear about. The one thing all can agree on, however, is that open banking has permanently changed the financial services landscape.

There are countless benefits and significant risks associated with the rise of open banking. While there are compelling arguments for both the convenience and personalization open banking can provide, there are security threats and data privacy concerns that may not have previously existed without it.

The open banking era shows the importance of pairing secure infrastructure with consumer trust and privacy. Amount makes digital financial experiences that align with the way we live. The Amount platform empowers your financial institution to modernize your user experience, streamline workflows, and optimize your growth – all in a fraction of the time with no disruption. Amount’s profit-proven enterprise framework centers the experiences around your user so you can focus on what matters most – enabling secure growth and delighting your customers.

LEARN MORE

Topics: Insight