The Disruptive Nature of Open Banking

November 2021

Fintech & Payments

Nick Maynard

VP of Research

Open Banking is driving the largest disruptors in the digital banking market, BaaS (Banking-as-a-Service) and embedded finance, first and foremost, by acting as an enabler for delivery of these concepts. While the idea of Open Banking may not be entirely new, its rise to prominence has been mostly fuelled by adoption of PSD2 and big tech initiatives in recent years. This has helped shape interaction patterns between traditional and emerging actors in the marketplace. As such, Open Banking is a game changer for business model innovation in the face of customer demands for seamless and ubiquitous financial products and services.

This practice is especially revolutionary for TPPs (Third-party Providers) to extend their scope and degree of financial services to areas other than banking with enhanced capabilities. For banks, although it might be perceived as the loss of data custodianship, Open Banking paves the way for their omni-presence by creating better and wider accessibility to banking services. Businesses such as big techs utilise Open Banking to tailor services according to their customers’ preferences and/or economic limitations; converting themselves into smaller-scale, FI-like organisations. 

The market for Open Banking, is therefore, a continuously evolving one, with one of its biggest impacts manifested at the end user/customer level. Since traditional banking products and services are made simpler and more convenient by TPPs through data access, customers can proactively shape the development of new offerings and manage their finances while doing so. Such trends are especially visible in the digital payments landscape, where merchants and customers transact in the realm of eCommerce and the greatest number of use cases powered by Open Banking emerge; supporting new forms of currencies (ie, crypto) and other transaction mediums, such as digital wallets and cards. 

The transformative nature of Open Banking can be examined from two perspectives: technical and conceptual. The former refers to the technical infrastructure powered by APIs; existing alongside customer channels and product/service lines, and built as a layer on top of core banking systems. Evolving from such infrastructure, the concept of Open Banking lends itself to multiple use cases across sectors such as core banking services, insurance, and lending, and links other ecosystem actors to banks and customers. The latter, on the other hand, represents the intangible aspect, comprising of created added value, financial transparency, customer awareness, regulatory involvement, and concerns around data privacy and security. Open Banking, in practice, sits on the intersection of the above by positioning itself as a governing regime connecting FIs and fintechs to the wider society and regulating their interactions. As such, the market is reflective of an interplay between APIs, regulations, FI and fintech relationships, and customer perceptions of Open Banking.

However, there is an integral part of customer education about what Open Banking is and the benefits it brings that need to be achieved before trust can be established between end users, TPPs and FIs. A survey we carried out in February 2021 found that 30% of the surveyed did not understand what Open Banking was. Although low customer awareness does not halt the growth of Open Banking’s due to its nature of being an enabling technology, rather than an end in itself, it can slow down customer consent, and, therefore, the process for developing new use cases for financial products and/or services. 

Furthermore, in its current form, Open Banking is perceived as an equaliser force for smaller banks but mostly for fintechs at the expense of larger legacy banks. The establishment and integration of enterprise APIs are also costly. Therefore, many mid-size and large banks have engaged in Open Banking by deploying basic APIs and shying away from committing to full-scale deployments. Tied in with the lower initiatives for legacy banks to embrace Open Banking practices, poor API availability is one of the biggest inhibiting factors for adoption. Use of outdated APIs and banks’ unwillingness to innovate (or in some cases, their desire to innovate entirely on their own) become stumbling blocks for the pace of Open Banking availability, and therefore adoption.