Banks have historically acted as custodians of customer data; however, over the last few years, a paradigm shift has been observed as customers are opting to take ownership and consent of handling their data to institutions based on their preferences. Banks and non-banks alike have acquired actionable insights to commence a range of innovative products and business models to better serve their consumer base.
Effective data utilization not only offers customers an improved grip on their financial health, but, it also assists financial institutions (FIs) to re-configure their approach towards customer experience. Customers are depending more on online financial services, popularly known as "doorstep banking", which have gained widespread appeal as a result of regulatory pressure and a developing FinTech ecosystem. For instance, in April 2016, the National Payment Corporation of India launched UPI which revolutionized customer perception and further caused an exponential rise in the use of online payments. In light of UPI's success, the government has often developed projects, such as account aggregators (Sahamati) and open credit networks (OCEN), as well as sub-products like UPI mandates for small-value transactions.
With the advent of digital banking transactions, customers are gradually becoming less reliant on physical locations and more willing to use online services for less complex tasks, such as payments, account-related services, card applications, and investment management. As a result, application programming interface (API)--based banking has played a key role in opening the door for the development of value-added data products. This advancement has made the sharing of information easy and secure, which has sparked the growth of transformative products and services. FIs across the globe are indulged to improve the efficiency of data acquisition and usage, which has led to an evolving concept of open banking.
Open banking has set the pace for efficient transformation in the banking industry. By fostering innovations in financial services, it is positioned to revolutionize not just how banks operate but also how and even why consumers and businesses choose their services. Further, the global pursuit surrounding open banking has been rising at a considerable rate, with all the major economies taking a close look at the benefits it is poised to bring to consumers. Open banking, however, is apparently quite varied across jurisdictions. While some countries, like the UK and Australia, have created well-defined regulatory frameworks, others, like India, have taken a more market-driven approach. Ultimately, it comes down to undertaking customers' control over how their information is shared and taking a targeted, data-driven approach to serving them. The framework also promotes cooperation between banks and other participants in the banking ecosystem by adopting uniform standards and protocols for data sharing and publicizing financial services.
An overview of the prime forces driving Open Banking adoption
Governments across the globe are taking proactive approaches to the “democratization” of financial products and services. The lead in this direction was ushered by the European Banking Authority (EBA) in the European Union by adopting the Payment Services Directive (PSD2) in 2015, effectively introducing Open Banking. A year later, the UK’s Competition and Markets Authority (CMA) issued new guidelines requiring banks to implement Open Banking by 2018. Banks are being forced by these laws to provide third-party suppliers with access to their confidential data. Hence, regulatory mandates and government initiatives are acting as a catalyst for the expansion of the Open Banking industry. As per the recent study conducted by AMR, the increase in the number of smart devices and the shift to instant payments, improved overall customer engagement with open banking APIs due to technology-fueled innovation, and increasing collaboration among financial services providers and FinTech are opening new opportunities that propel the open banking market growth.
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Many players backed by technology Giants like GAFA – Google, Amazon, Facebook, and Apple, have come into the fray of financial service offerings. Increasing competition for banks by offering quicker payment options and supporting the seamless integration of cards, e-wallets, and other payment methods, ramping up the adoption of open banking. These participants are actually more than willing to provide their services to the open banking ecosystem. According to the UK survey, about 81% of fintech companies are actively planning for the chances that open banking brings, and nearly 94% of them perceive it as a key opportunity. This has resulted in the robust demand for Open Banking solutions and services, which in turn, presents a lucrative opportunity for the growth of the open banking industry.
Opportunities in the Open Banking ecosystem Globally, financial services regulators are progressively concerned with promoting competition and innovation in the banking environment, reducing barriers to entry, and empowering consumers. Of all these strategies, the most far-reaching and significant is open banking, prospecting a new opportunity for the open banking sector. Along with this, the development of APIs, which enable systems to communicate with one another, is creating the framework for the open financial system. The adoption of cloud-based systems will increase the institutions' capabilities' flexibility, agility, and scalability. These factors induce the market players to introduce new product offerings that integrate with cloud technology. For instance, in April 2023, Intellect Global Consumer Banking launched eMACH.ai, an open finance-based core banking platform hosted on the Amazon Web Services (AWS) cloud. Therefore, the cloud migration in open banking platforms to enable secure openness is paving the way for strengthening open banking adoption. Furthermore, numerous economies have paved the way for raising open banking adoption, with an objective to benefit customers with better financial outcomes.
In addition, financial institutions may generate new revenue streams by offering APIs and other services to third-party providers and may reduce costs by automating some processes and eliminating the need for manual data entry. Therefore, open banking is directed at customer benefits and is planned to bring a host of changes in the banking environment driving values for customers and the industry stakeholders at large. These aforementioned factors often act as a lucrative opportunity to pave the development of the open banking industry,
Potential risks and challenges in the Open Banking industry
Open banking offers a number of potential benefits for customers and financial institutions, but it is important to be aware of the risks involved. Some potential risks associated with open banking, including:
