Could Open Banking be open to the wrong type of participants?

Open Banking ‘OB’ aims to give third-party service providers open APIs to access customer banking and financial data from banks supporting online or e-money accounts. Users must consent for their bank and other financial service providers to share information about their accounts with OB platforms. This initiative has stimulated innovation in the fintech industry and led to the development of new products and services that improve consumers’ experience and access to services. The technology has spread internationally, and many countries are implementing their own strategies, reflecting local market and policy goals and, in some cases, creating cross-industry strategies outside the financial services sector. These developments can all be broadly divided into two groups:

• Market-driven: While several nations, such as India, Japan, Singapore, and South Korea, do not currently have statutory OB regimes, their policymakers are proposing several initiatives to encourage and accelerate the adoption of data-sharing frameworks in the banking industry. In the USA, the government has, for the moment, chosen a market-led approach rather than implementing a new policy.

• Regulatory driven: Europe pioneered OB with the EU's PSD2 and the UK's implementation under the Payment Services Regulations. OB now has over 6 million active users in the UK, the highest in Europe. Outside of the EU, Australia and Hong Kong may be two significant countries that have chosen a regulatory-driven strategy.

OB offers clear benefits to both merchants and consumers. Merchants can accept digital payments in real time by bypassing traditional card payments. This gives an advantage over traditional card payments, especially since it is cost-effective and improves the merchants’ cash flow. Additionally, OB is considered to have promoted the development of embedded finance, allowing financial providers to enable merchants to issue financial products within their environment. Merchants can embed additional value-added features such as data-driven services, credit applications, the credit assessment, budget monitoring, etc. Merchants can drive online conversions and increase the engagement of their customers, thereby deriving new revenue opportunities.

For the consumer, OB has the potential to offer tailored products and services designed from the ability to access their financial data. Users will now get services that match their consumption behaviours with a much simpler and improved customer experience due to the availability of financial information. One of the key advantages is the variety of credit services available to clients. Companies that offer loans will make credit offers considerably quicker, assisting customers in getting the money they need at the precise moment they need it. There is a growing number of providers offering white-label solutions with core banking capabilities, referred to as Banking-as-a-Service (BaaS), such as Finastra, Divido and Crosskey. Another opportunity for consumers would be to enhance the management of their personal finances using products that offer visibility, control, and immediate guidance on how to use their money as efficiently as possible. Meniga and Benkin are examples of companies proposing end users’ personal financial management based on data sharing and OB. These are just a few examples of how open banking helps users. These benefits could significantly expand depending on the innovation and new services financial institutions are ready to introduce. As for security, OB systems use secure protocols, such as tokens, to guarantee that only authorised parties can access a customer's financial information. Additionally, OB systems must adhere to stringent regulatory standards, such as the EU’s Second Payment Services Directive (PSD2) and the Open Banking Standard of the United Kingdom, designed to safeguard consumers' financial information and guarantee the security of OB systems. But there are still some inherent risks. For instance, if a customer gives an unreliable third-party provider access to their financial data, this may result in fraud or data breaches. Consumers should also be aware that open financial services can be the target of phishing attacks, which aim to deceive people into disclosing sensitive information. Based on a market research survey published by Sensedia “Shifting to Open Banking” in February 2022, potential identity theft (cited by 69%) and data misuse (cited by 60%) were the two aspects of OB that respondents said most worried them. Financial concerns, such as running out of money, came in reasonably low (41%). The increase in data breaches and theft seems to have increased consumer concern for privacy protection.

Consumers should be cautious about whom they share their financial information with and only utilise OB services from trusted providers to protect themselves from these hazards. Moreover, they should keep a close eye on their financial accounts for any suspicious behaviour and notify their bank or the appropriate authorities of any suspicion. The European Commission will likely propose a new amendment to the Payment Services Directive – the PSD3. The purpose is to regulate banking in the European Economic Area, including electronic payments. It is not likely to get implemented before 2026, but PSD3 will strengthen the regulation's essential components in terms of security, consumer rights, and the value of the products and services available in the current financial environment.

In EDC’s view, the primary objective of Open Banking is to empower consumers and ensure consumer choice. With OB, consumers are being put at the heart of the financial ecosystem, enabling more innovation and more players entering the ecosystem to create more tailored and relevant financial products and services. It is difficult to predict with certainty what specific new services OB will provide in the next few years. The development and implementation of OB will also vary depending on the region and regulatory environment. Nonetheless, there are a few possibilities of what OB may include in the future. Data sharing will be the new normal, and it may expand to include more types of data and more participants in the ecosystem. Greater integration with other financial services will evolve as OB expands beyond account data and payment initiation. This could include integration with other financial services, such as investment management and insurance providers. Finally, more advanced security measures such as biometric authentication and blockchain technology will be needed to provide an added layer of security.

Overall, feedback from consumers regarding OB has been generally positive, as it allows for greater convenience and choice in managing their financial information. Many consumers appreciate the ability to easily compare financial products and services from different providers and the increased security and control over their financial data. OB is crucial because it lays the groundwork for innovation and the financial services revolution. EDC assists various companies in the payment value chain in developing their future product and service roadmaps in response to Open Banking developments.

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The content of this article does not reflect the official opinion of Edgar, Dunn & Company. The information and views expressed in this publication belong solely to the author(s).