Advances in technology, especially in blockchain, Artificial Intelligence (AI), and Machine Learning (ML), have generated new ideas on how to provide better financial services to users. Due to these advancements, as well as legislative aspects such as the European regulation on electronic payment services called PSD2 and the Fintech Law in Mexico, a foundation has been established to build technological financial systems. These systems are oriented towards open data that foster competition and innovation in the sector.
The Model of Open Banking
Open Banking was born in 2015 when the British government promoted the creation of the Open Banking Working Group (OBWG), with the mission of allowing banks and companies of all types—not necessarily financial—to generate value propositions for their customers, thus promoting innovation in the financial system. The integration occurs through programming interfaces called API´s (Application Programming Interfaces), giving life to Open Banking ecosystems.
The open banking model aims for the public, and transactional information of financial entities (and other participants in the financial system), as well as users, to be exchanged to promote greater competition among intermediaries and offer products and services tailored to users.
One of the concrete benefits of open banking is that users, as true owners of their information, will be able to consolidate information about bank accounts and savings, mortgage loans, and credit cards into a single system, even if these products are from different banks. Based on the information that customers share with a third party—whether on a one-time basis, for a set period, or indefinitely—they will also receive recommendations on how to pay fewer service fees, achieve higher returns, or pay off their debts faster. The goal is to provide customers with a greater range of financial products and services, a broader view of their finances, and a better mechanism for managing their money and other services, all at a low cost.
Through APIs, which are interfaces for secure data exchange, the process mentioned in the previous paragraph can be carried out once the client authorizes the sharing of information within the financial system.
The concept of open banking reflects a cultural shift driven by technological innovation, artificial intelligence, big data, and blockchain. As of now, the majority of countries are acting based on a regulatory environment, however, countries like the US are following a market driven approach.
Advances in technology, especially in blockchain, Artificial Intelligence (AI), and Machine Learning (ML), have generated new ideas on how to provide better financial services to users. Due to these advancements, as well as legislative aspects such as the European regulation on electronic payment services called PSD2 and the Fintech Law in Mexico, a foundation has been established to build technological financial systems. These systems are oriented towards open data that foster competition and innovation in the sector.
Keys to a Secure, Customer-Oriented Open Banking
For open banking to be implemented, there must be a regulatory framework that protects consumers and their interests. Some key aspects for developing a healthy framework, according to a group of experts from the European Commission and the European Financial Data Space, are as follows:
- Customer experience: Includes ease of use and customization.
- Financial inclusion: Enhances access and use for all customer segments, focusing on small businesses and individuals who are often excluded from the financial sector.
- Empowering users: Ensuring they have control over their information and the highest level of security.
- Innovation: Using AI and ML to benefit the user, reducing the inherent risk in these systems.
- Horizontal approach: Integrating the concept of open banking across different sectors.
Worldwide Initiatives
Global companies like The Stellar Development Foundation (SDF) are working with financial institutions to support the open banking initiative. SDF recently issued a letter to the U.S. Department of the Treasury, highlighting their work on financial inclusion and their ongoing efforts to promote the use of open systems.
In the letter, SDF states “Our response also highlights the significance of open data to further financial inclusion efforts. For example, Brazil’s open banking initiative allows customers to opt-in and permit their bank to share financial data like transaction history with independent third-party providers. SDF supports initiatives like open banking that leverage open data to empower consumers to own and use their data to access a wider range of services.”
Open Banking Use Cases
- Identity Authentication: E-commerce businesses use open banking to authenticate customer identities by verifying their banking credentials, reducing identity theft and fraud in online transactions. Financial institutions and third-party providers can access identity-related information to confirm that a person is who they claim to be.
- Peer-to-Peer Transfers: Open banking has enabled the creation of third-party applications that facilitate peer-to-peer transactions, making them faster and simpler, while reducing the need for checks and cash.
- Integration of Multiple Banking Services: Third-party applications use open banking to integrate multiple banking services into a single platform, allowing users to manage various accounts, conduct transactions, and access additional financial services through one application.
- Loyalty Programs: Open banking can improve loyalty programs. Businesses can design personalized rewards by analyzing transaction data and customer spending patterns to identify qualifying purchases. This creates more engaging and customized loyalty programs.
Market Size
According to Grand View Research, a market research firm located in California, the global open banking market size was estimated at USD 25.14 billion in 2023 and is expected to grow at a CAGR of 27.4% from 2024 to 2030.
The changing payment ecosystem and the rising adoption of APIs bodes well for the market’s growth. For instance, according to Visa’s Open Banking Consumer Survey conducted in April 2022, around 87% of consumers in the U.S. are using open banking to link finance accounts with third parties.
The growth of the open banking market will be based on the global adoption rate of technologies such as AI and ML
The concept of open banking is gaining momentum by leveraging the capabilities of Artificial Intelligence, Machine Learning, and API development. Users of financial services will benefit from this new service by obtaining better services tailored to their needs and reducing commission costs. Financial institutions will also benefit by offering services that truly serve their customers, achieving a higher conversion rate in their sales.
The challenge ahead is the rapid adoption of these new services in an industry where business models have not changed in recent decades.
References
- Deloitte
- BBVA
- BBVA API Market
- Stellar
- Grand View Research
- Stripe
- The power of open banking: exploring the next wave of use cases. Boston Consulting Group and Klarna Kosma. 2023
