The Steady Rise of Open Banking: Laying the Foundations for Open Finance

To say that the banking industry has been on something of a journey when it comes to open banking would be an understatement.

As recently as 2015, PSD2 (which provides the regulatory framework for open banking in Europe) was widely viewed by banks in the region as a compliance matter; something that should be treated in the same manner as other regulatory requirements. The concept of opening up of data and banking services for consumption by third parties was at that time an alien one — anathema to an operating model that has always been based upon providing customers with a security-first service offering.

Fast forward to today, and the landscape looks very different. The focus on the digital customer experience has not gone away but the centre of gravity around open banking has comprehensively shifted. Important here has been a re-characterisation of the fintech ecosystem as a source of potential innovation for banks, rather than being a direct competitive challenge.

Indeed, for a growing number of financial institutions, external-facing APIs have become viewed as a new distribution channel, with third party providers (TPPs) and developers a discrete customer segment. Others are going even further and laying the foundations for entirely new business models. Open banking has opened the door to banks wishing to explore marketplace structures and even platform structures.

Given the scale of the changes underway in the industry, it is important to revisit and understand exactly where open banking is today and where it could take the future of retail, SME, and corporate banking.

What is becoming even more apparent is that the versions of open banking we see today are only the beginning. Despite the industry being very much in the early stages of implementation in almost all cases, there is already growing interest in moving beyond this to include a far broader spread of financial products — something widely referred to as “open finance”.

Key findings of the report include:

• Open banking initiatives are developing in all regions. All major economies are either live with some form of open banking initiative, in consultation, or there is a clear market-led approach in play.
• The TPP ecosystem has continued to grow over time. Taking Europe as an example, the TPP segment has grown steadily since 2018. As at the end of Q1 2020, there were 290 TPPs licenced under PSD2.
• The industry should support the creation of scheme-like entities to address the issues limiting adoption.
• Regulators are beginning to look at launching open data and open finance initiatives.
• Open finance will open the door to a wide range of new products and services.

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