Open banking, and its powerful offshoot open finance, loom as inevitable and fundamental change agents to the banking industry, while the pace and courses taken will vary according to the market. In Europe, for example, open banking was imposed by government, while it is developing as a result of market forces, mostly, in the U.S.
The long-term significance of this movement continues to unfold.
“Open finance marks a turning point for collaboration in financial services,” states Jacob Morgan, Principal Analyst at Forrester, in a blog. “It brings the ability to reduce friction through automation, to combine real-time insight across multiple sections, and guide customers to contextualized, personalized results.”
Putting some numbers on the open trend, in 2021 there were 26.6 million open banking payments, an increase of 500% in just 12 months, according to Helen Child, founder of Open Banking Excellence, a community of open banking practitioners.
“There is no logical reason why we cannot add a zero here and grow this to 260 million…The addressable market created by open banking will be worth $416 billion in the next three years,” Child writes in the foreword to a report on the state of open banking and open finance.
Banking institutions still sitting on the sidelines may glean some urgency from the source of the 2021 number that Child cites. It comes from an Accenture report that sees a wave of change building.
“The belief that a wait-and-see approach is safest may be dangerous,” Accenture’s report warns. “Banks that are not yet considering their place in the open data economy risk yielding the market to more agile competitors. After all, one of the key attributes of the open data economy is a blurring of the lines between industries.”
The trend is toward financial “ecosystems” on multiple fronts. As an article on open banking from Amazon Web Services recounts, this trend has accelerated not only in banking, but more broadly with financial services.
“Although banks embarked on this journey with open banking as a catalyst, many have embraced the augmentation of their business models and acquisition of new customers, often referred to as open finance,” Amazon states.
Adding momentum to the open banking trend, the Consumer Financial Protection Bureau has put plans in motion to issue rules that would obligate financial institutions to share consumer data upon request. (More on this in the final section of the article.)
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Evolving from Open Banking to Open Finance
Terminology sometimes muddles understanding of this rapidly developing combination traditional and nontraditional financial banking services.
MX, which furnishes services enabling these strategies, provides some definitions, distinguishes between the two key terms in this way:
“Open banking is the structured and secure consumer-permissioned sharing of data… between financial service providers,” it says in a guide to terminology, clarifying that this strategy is limited to retail and investment banking.
Open banking is “the ability to access and act on financial data to build personalized experiences, increase the pace of innovation, and drive industry collaboration.”
Open finance, on the other hand, “is the next step beyond open banking, enabling access and sharing of consumer data to even more financial products and services – not just banking,” MX says. “This includes loans, consumer credit, investments and pensions. It also enables wider integration of financial data with nonfinancial industries, such as healthcare and government.”
Research indicates that open finance is gaining a solid foothold. Finastra interviewed financial institution executives in seven countries. “85% of professionals agree that open finance is already making the industry more collaborative and is having a positive impact,” it states. “Eight in ten consider the sector open to collaboration, with 87% recognizing this as an improvement compared to five years ago.”
Guide to more terminology
Understanding the trends requires some definitions. Jim Marous, Co-Publisher of The Financial Brand and CEO of the Digital Banking Report and host of the Banking Transformed podcast, defines some key terms beyond open banking and open finance as follows:
Embedded Banking means providing integrated and seamless front-end access to a banking service or services for an outside organization.
Banking as a Service means providing the technological back-office for banking to an outside organization, using APIs. (Application Programming Interfaces)
The Customer Weighs In Open Banking and Open Finance
From the customer’s point of view, research shows that while they may not be able to define “open banking,” customers do like what it would enable them to do.
Take this common pain point.
One thing consumers dislike, in this day of mobile financial apps, is having to write checks to make transfers between accounts. “21% of Americans said they had recently written themselves a check from one bank and cashed it in the other,” says a report by Axway, which specializes in APIs. “16% withdrew cash and physically deposited it in their other bank. It should not have to be this way.”
“If financial institutions accept and embrace this new operational model, they can use APIs to become more flexible and drive new revenue by extending their reach, embedding themselves into all kinds of digital experiences,” the report states.
How Open Banking and Open Finance Can Improve Financial Services
“All kinds of digital experiences” covers a lot of ground. But there are plenty of concrete examples.
“By looking at data across sectors, including banking, financial services, and wider data such as utilities, telecom, retail, or even health, businesses can quickly and securely transform data into super-personalized offers, products, and services,” suggests Samantha Seaton, CEO of Moneyhub.
She adds, as quoted in the Open Banking Excellence report, that many consumers “will think nothing of sharing Google Map data and details of their spending with a fintech when buying a car. Consumers will also consent to having their income verified in order to rent a property or qualify for a mortgage.”
“Many businesses still have to understand they don’t own any data; consumers own their data and consent is key.”
—Samantha Seaton, Moneyhub
Amazon Web Services foresees open finance as enabling such things as integrated personal financial management solutions for retail customers, as well as small business solutions such as providing restaurant merchants with software to support online orders and card acceptance.
Accenture, for its part, sees financial institutions adapting banking as a service in multiple levels of payments, such as providing P2P platforms, servicing unbanked populations, and embedding treasury services via APIs into e-commerce companies that service merchants.
Three months into introducing open banking at Truist, Anthony Burton, SVP of Open Banking, provided some insight on open banking use during a Banking Transformed podcast with Jim Marous.
“Once we created that infrastructure of data in, data out collaboration, with connectivity with all, this opened up many possibilities,” says Burton.
“It could be something where we’re working with fintechs to not just provide innovative juice to us, but actually give us fresh data that we don’t normally use for maybe underwriting,” says Burton.
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Where Open Finance and Rising ESG Trend Intersect
A major potential use case cited in the Open Banking Excellence report is ESG — environment, social, and governance — services.
“In the long term, banks should develop inventive new applications for ESG, embedded finance, and digital assets,” says Deloitte Insights. “These efforts should prioritize empowering customers with initiatives targeting racial equity, de-carbonization, and data security.”
“It’s no surprise that one of the biggest cross-sector trends on the horizon for open banking is one that is still in its relative infancy – the shift towards sustainable finance,” says Daniel Kjellen, cofounder and CEO of the open banking platform Tink, quoted in the OBE report.
For example, Kjellen pointed out that financial data acquired through open banking provides consumers and businesses a broad overview of their finances and the environmental impact of their financial decisions.
“In this way, open banking enables us to incentivize sustainable consumer behavior,” Kjellen explains.
CFPB Action Plan Will Accelerate Open Banking
While analysts indicate that the pace of adopting open banking and open finance is picking up, there’s a good deal of convincing of the public to occur. Research by Creditspring cited in the OBE report indicates that 52% of people surveyed by the firm do not want to share data.
With just over half of the study sample not being willing to share data, “there is still considerable work to be done by the government and financial industry to educate the general public about the benefits of open banking, and latterly open finance, and how their data will be used and protected once shared,” says Neil Kadagathur, cofounder and CEO of Creditspring.
That has not stopped the U.S. government from advancing key elements of open banking.
Significantly, a wide-ranging 2021 executive order from President Biden, directed the Consumer Financial Protection Bureau “to issue rules allowing customers to download their banking data and take it with them.” Nothing much publicly occurred following that order until now.
In a October 2022 speech at the Money 20/20 conference, CFPB Director Rohit Chopra said the agency will launch the process to activate a dormant authority under Section 1033 of the Consumer Financial Protection Act that Chopra expects will accelerate the shift to open banking.
While not explicitly an open banking rule, Chopra said the new requirement will obligate financial institutions to share consumer data upon consumer request.
“Here is where we are headed,” he said in his speech. “First we expect to propose requiring financial institutions offering [various] transaction accounts to set up secure methods for data sharing.
“Second, we will be looking at a number of ways to stop incumbent institutions from improperly restricting access when consumers seek to control and share their data.
“Third, we are exploring safeguards to prevent excessive control or monopolization by one, or even a handful of, firms.”
A “discussion guide” to be issued by the bureau will collect comments.
Following that, Chopra stated, “In the first quarter of 2023, we will publish a report about the input we received through that process. This will inform a proposed rule that we are planning to issue later in 2023. We then hope to finalize the rule in 2024 and move to implementation.”