EVP and CTIO at Axway, responsible for accelerating global innovation and transformation.
This article is the first in a two-part series. Part one explores major pressures banks face as API-driven, open banking ecosystems emerge across global markets. Part two suggests best responses for banks as the financial sector undergoes this seismic shift.
Open banking is disruptive, global and growing at a breakneck pace. According to Allied Market Research, the open banking market is growing at 24.4%, reaching $43.15 billion by 2026 and accelerating by the pandemic but part of an inevitable control shift in the financial sector. As it grows into open finance, it is beginning to fundamentally redefine customer interaction with the financial system by revising who creates and manages financial products and services.
This new decade will witness not a downfall of big banks in favor of light and swift fintech, but rather these banks’ metamorphic adaptation to technological and market pressures.
Unsurprisingly, banks are in a state of tension, trying to hold on to privileged institutional status and traditional models that feel safer, all the while knowing juggernaut change is well underway. Open banking gives third-party providers open access to banks’ consumer and business accounts, transactions and other financial data through application programming interfaces (APIs). Open banking’s kindred extension, open finance, allows any business to offer lending, investments, insurance and other creative financial services to end-users, often at the point-of-sale for retail products, as well as via open APIs.
While many nations require accreditation and registration of these third-party providers, in addition to consumer consent, regulatory standards differ significantly across the world, with the U.S. still nascent in a unified approach among stakeholders — banks, fintech, bigtech, consumer protection interests and federal and state governments. For the development, testing and production of open banking applications leveraging APIs, third parties cannot innovate effectively without access to sensitive financial data. It’s easy to sympathize with the banking industry’s skepticism amid the tumultuous circumstances and ambiguous guidance of the past few years.
But the maturity of API standards and the implementation of real, working systems has fueled the adoption of open banking significantly faster than that of other disruptive tech in the financial sector, like blockchain’s distributed ledger.
Examining pressures on banks and the best responses to them can help all stakeholders move forward with open banking intelligently and decisively.
Under Pressure: The Mercurial Rise Of “Freedom To”
At least three major pressures are forcing banks to reimagine their platforms and the way services are built and offered for business clients and individuals. Despite the genuine protections banks have provided since New Deal reforms, trust in them is low because of a sense, rightly or wrongly, that banks act more in their own financial interests than those of their clients. The pressures to embrace open banking are informed by a customer freedom-to-act mindset. They revolve around mobile ease, tech-based competitors and diverse global regulation.
Mobile Convenience Means Eager Consumers
Mobile devices, with their rich app ecosystems, are ubiquitous. Consumers expect all services to flow easily at the touch of a button. Banks have reacted to digitally native services in other economic sectors by releasing mobile banking applications, but their service ecosystems remain limited. Hungry, choice-oriented consumers have demonstrated compelling trust in well-designed apps. People and businesses are freely choosing to give third parties access to their bank accounts, even when the security around that access is questionable, hoping that their data will create new value for them. This happens in the U.S. without FDIC-backing. Convenience outweights risk. Banks feel the weight of consumer expectations for lightning-fast convenience but also for historical assurances that money will be safe — goals that often appear contradictory.
Big Tech And Fintech Are Challenging Financial Traditions
Banks face two kinds of technology-based competitors: bigtech and fintech. The first are the tech giants increasing their own financial service offerings, such as Google Wallet, Amazon Lending, Apple Credit Card and Facebook P2P Payments, among others. This array will only expand in the new decade.
Fintechs are coming to the banking table generally well funded and focused on a particular niche. Using open banking APIs, they tend to build slick, user-centered apps faster than a bank can offer them. The result is often improved savings, lending, payment and money management experiences for businesses and individuals, as well as comprehensive behavior metrics and a drastically improved customer experience.
Diverse Global Regulations Reflect A Range Of Governing And Industry Priorities
The EU’s 2020 Second Payment Services Directive (PSD2) deadline required banks to offer a payment initiation API and spurred Europe and Scandinavia to move fast in establishing platforms. But most EU banks still only average four APIs in their product suite. In the Asia-Pacific region, the Monetary Authority of Singapore’s published taxonomy of bank API functionalities focuses on granular APIs that expose specific capabilities. Asia-Pacific banks, as a result, lead the world’s open banking movement by that measure, with Singapore as a country averaging several orders of magnitude more API products than EU banks.
North America is more subdued. It remains to be seen how the U.S. Treasury, FDIC and CFPB, under a new administration, will act.
Where regulators have weighed in, critiques focus on monopolistic banking markets and anachronistic practices that yield slow responses to consumer needs, especially their freedom to manage their own money and data. Essentially, governing officials and disruptors want to know why people can get transportation in minutes, but moving their own money from bank A to B takes three weeks and many forms.
Part two of this series will examine how banks can best respond to these pressures by finding the right fit in mutually beneficial partnerships. Specific kinds of business relationships are evolving within open banking that create growth and security opportunities to help banks adapt successfully in a new decade of digital and behavioral transformation. The good news is that today’s banks already have existing partnerships in place that could be leveraged. It’s vital to understand your existing partner and business relationships to determine how and where to leverage new ones in this era.