In an era where data is often termed as the “new oil,” financial markets are undergoing a significant transformation. This transformation is altering the way businesses conceptualize and offer new products and services to their clientele. One of the most groundbreaking developments in this context is the advent of Open Banking. This paradigm shift allows third-party organizations to access banking data and marks a revolutionary and disruptive era for financial services. As a consequence, banking institutions are finding themselves in a position where a reevaluation of their existing operations, strategies, and business models becomes imperative. Moreover, this shift is making it abundantly clear to corporations that the focus on user experience is not just pivotal but also a decisive factor for their future.
In light of these changes, this article primarily aims to address the following key questions:
Banks are transitioning from a self-centered model, focused on their own interests, to a more open model focused on developing a banking ecosystem that puts the customer experience at the center. This change is necessary for banks to survive and thrive in the long term in an increasingly complex and competitive world.
With the emergence of fintechs (financial technologies), banks have realized that they must evolve and adopt a more open approach to keep up with trends. This means that they must begin to share data and services with other financial institutions. By opening to others, banks can benefit from the innovation of these actors and focus on their core activities.
The new banking ecosystem emerged in Europe thanks to the European Payment Services Directive (PSD2) of November 25, 2015, which came into effect on September 14, 2019. This manifests first and foremost by the necessity for banks to set up dedicated interfaces with TPPs (Third Party Payment Service Providers), which can be APIs (Application Programming Interfaces) for secure access to payment account data. Subject to the client’s consent, this opening of payment data to actors approved by the EBA in EU for exemple, has allowed the development of new value-added services around payment data, such as real-time credit risk analysis, payment initiation, or account aggregation.
In recent years, many financial institutions have approached the topic of Open Banking and have expressed their support, but very few of them are actually exploiting its opportunities. We observe that the sector is rapidly evolving, moving from the initial phases of “Open Banking 1.0” (First developed as a regulatory framework in the European Union and the United Kingdom) to a more sophisticated level often called “Open Banking 2.0” or even “Open Finance.”
In the context of “Open Banking 1.0,” 16 countries had launched the first initiatives in this direction, focusing on infrastructure, the regulatory framework, and developing good standards on how to use open APIs to give customers more options and flexibility in enriching and using their financial data.
Today, more than 1,578 Open Banking platforms have been created, 5,564 APIs, and 2,854 fintech applications with APIs have been developed by the end of Q2 2022. With Open Banking 2.0, not only banks but also fintechs, wealth management companies, insurance companies, and other financial institutions are seeking to create economic impact by better understanding their clients.
Open Finance is creating a wave of new opportunities in various sectors, among others:
Open Banking and Open Finance are undeniable and irresistible trends. Banks and other financial organizations considering adopting open finance will have the opportunity to gain a significant advantage over their competitors while building stronger relationships with their clients.
The API is the cornerstone of the ecosystem and guides the strategic approaches adopted by banks. The benefits of this technological innovation are numerous, among them :
The variety of uses around APIs has led us to discover four major strategic models of Open Banking. These models can be applied in an evolving perspective according to the objectives of the bank :
Similar to Open Finance, “Open Banking 3.0,” often referred to as “Open Data,” is also driven by the massive volume of data generated daily through continuous exchanges between individuals and institutions worldwide. The quantity of exploitable data continues to grow; it’s estimated that global data quantities double every 1.2 years.
The fundamental idea remains the same: Each person possesses their own data and chooses to grant access to it in order to reap benefits, whether through obtaining new services, acquiring products, or simply receiving appropriate customer service of any nature. This represents a new data-sharing movement, facilitated by new highly accurate tools for refining collected data and generating valuable insights.
With the rise of Open Data, the collected and processed data (commonly referred to as “Smart Data”) can be used by other sectors of activity, such as transportation, energy, telecommunications, etc. Driven by the interest that this invaluable intangible capital of information generates, many organizations are collaborating to develop and generalize its access and use. Indeed, according to a study conducted by the McKinsey Global Institute, the widespread adoption of Open Data will have a positive and significant impact on the GDP of large economies such as the United States, the European Union, and the United Kingdom by 2030.
