Open banking is at an inflection point, with usage, partnerships, and funding on an upward trajectory. We analyze the growing trend and the implications of API-led consumer data transmission for the rest of financial services.
Open banking is fueling a new age of financial services.
What began as a niche movement has grown into a global phenomenon, with APIs being leveraged to build products and services that give users greater control over their financial lives. Open banking tech has especially gained momentum in the wake of the global Covid-19 pandemic, which drove up demand for digital financial services.
Over the past several years, the open banking industry has seen record levels of capital pouring in, increased buy-in by major financial institutions, global regulatory change, and a burgeoning partnership ecosystem.
Companies like Plaid, Tink, Klarna are rapidly gaining household recognition. These players provide the connective layers fueled by open APIs to allow third parties to share financial data, spurring creativity and innovation in product development.
As open banking ushers in a new era of financial services, financial institutions — banks, specifically — will need to be proactive in addressing and catering to their customers. In addition to traditional consumer and business users, banks will need to increasingly focus on a new class of developer users.
Table of contents
- What is open banking?
- Where the opportunity lies
- The current state of the market
- The outlook for open banking
- Looking forward
What is open banking?
Open banking is a developing trend in financial services that enables users to authorize secure exchanges of bank account data to a third-party service provider (TPP).
While the sharing of customer-permissioned banking data with third parties is common in traditional banking, open banking differs in that it relies on application programming interfaces (APIs) and advanced data aggregation techniques to systematically access and share this data.
As a result, third parties can build applications and services that enable faster and more convenient payments, greater visibility into personal finances, and net new services.
A BRIEF HISTORY OF open banking
The origins of open banking can be traced back to 2 important regulatory catalysts in Europe: the European Union’s Second Payment Services Directive (PSD2) and the UK’s Open Banking initiative, both of which rolled out in 2017-2018. High consumer overdraft fees, low interest rates, and minimal customer switching were among the principal drivers for authorities to take a regulatory approach to stimulate competition in the financial services industry.
PSD2 and the Open Banking initiative altered the banking playing field significantly by mandating banks to open up access to their data. Specifically, PSD2 required regulated banks and payment service providers to make customer data systematically available via APIs to customer-permissioned third parties, per the “Access to Account” rule, or XS2A. This mandate placed significant infrastructure and compliance costs on banks, as well as opened external access to a key competitive advantage — customer data.
The UK’s Competition and Markets Authority (CMA) took PSD2 one step further by creating the Open Banking Implementation Entity (OBIE) — governed by CMA and funded by the 9 largest banks in the UK, collectively known as the CMA9 — to create standardized protocols and industry guidelines.
OBIE is in charge of promoting the use of open banking standards by designing API specifications, providing support to third-party providers and banks, establishing security and messaging standards, and maintaining a directory of regulated participants.