The financial landscape is undergoing a transformative shift with the advent of open banking. This innovation, driven by regulatory frameworks like the European Union's Payment Services Directive (PSD2) and the upcoming PSD3, is dismantling traditional banking monopolies and fostering a more competitive and dynamic financial ecosystem.
Open banking has evolved from a novel concept to a cornerstone of modern financial services. In the UK, spearheaded by the Open Banking Implementation Entity (OBIE), it has seen significant adoption. As of May 2023, over 96.4 million payments have been processed through open banking with a 99% success rate, and the user base has grown to seven million. This rapid adoption highlights the efficiency and reliability of open banking systems.
Open banking allows third-party providers access to consumer financial data with explicit consent, paving the way for innovative financial services that benefit both consumers and businesses.
Key developments in open banking
Regulatory advancements
PSD3: The third Payment Services Directive aims to enhance connection quality and consumer adoption, requiring banks to create permission dashboards for customers to manage third-party service connections.
Global Adoption: Countries worldwide are implementing similar frameworks, increasing the global value of open banking-powered payments. Juniper Research estimates this value will surpass $330 billion by 2027, a staggering increase from $57 billion in 2023.
Technological innovation
Payment Orchestration: Innovative paytech companies are offering advanced payment orchestration controls, allowing merchants to switch seamlessly between various payment methods. This flexibility helps reduce costs, eliminate chargebacks, and increase payment volumes.
Competitive landscape
International Growth: Western Europe is expected to account for 56% of global API calls by 2024, showcasing the region's leading role in open banking adoption. Emerging markets are also poised to benefit significantly from open banking, particularly in remote payments and mobile banking.
Impact on different stakeholders
Businesses
Efficiency and cost savings: Open banking enables businesses to streamline operations, reduce transaction costs, and automate tasks like accounting and compliance. This leads to more efficient operations and protects profits.
Fraud prevention: Advanced encryption and real-time authentication in open banking payments reduce the risk of fraud by up to 61% by 2024.
Customer satisfaction: Businesses can offer smoother and more secure payment options, enhancing customer satisfaction and retention.
Customers
Empowerment and control: Open banking allows customers to control their financial data, sharing it selectively with third-party providers. This control ensures security and privacy while providing access to a broader range of financial products and services.
Enhanced security: Open banking payments are protected by industry-standard security measures, providing robust defense against fraud.
Banks
Data-driven insights: Banks can gain deeper insights into customer behaviour and financial needs through open banking. This data can help personalise offerings and improve customer engagement.
New revenue streams: By collaborating with fintech companies, banks can offer value-added services beyond traditional banking, creating new revenue opportunities.
Regulatory compliance: Open banking ensures that banks comply with evolving regulatory requirements while enhancing data security.
The evolution from open banking to open finance is on the horizon. This next phase will allow data sharing beyond transactional bank accounts to include other financial information like pensions, insurance, and investments. This broader data access will enable the creation of more interconnected and personalised financial ecosystems, fostering innovation and improving financial decision-making for consumers and businesses alike.
Open banking is not just reshaping the future of fintech and finance; it is democratising access to financial services, enhancing security, and driving innovation. As global adoption continues to rise, open banking is set to become a fundamental component of the financial landscape, benefiting all stakeholders involved.