Open banking is on the rise in Europe. A quick search on Google Trends demonstrates just how rapidly interest in the term has skyrocketed over the past five years. However, we are currently only witnessing the beginning of a phenomenon that will revolutionise financial services. Exactly who will benefit the most from open banking is widely speculated; my money is on the tech giants — here’s why.
When I founded Salt Edge in 2013, the company’s two products, an aggregation platform and personal financial management tool, aggregated customer data via screen scraping. Open banking didn’t exist yet; it would be another five years before the revised Payment Services Directive (PSD2) came into effect. Up until then, Salt Edge had neither access to banks’ APIs nor any idea of just how much open banking would change its business model — let alone the face of finance — over the next decade.
The impact of PSD2 on financial services
By mandating financial institutions share data with third-party providers (TTPs), PSD2 aimed to increase competition and innovation in the financial services sector, which has traditionally been dominated by retail banks. Initially, it seemed that TTPs had the most to gain from the new regulation, since banks were forbidden from monetising their APIs and had relinquished exclusive control over valuable consumer data. Two types of TTPs subsequently emerged: account information and payment initiation service providers (AISPs and PISPs), and the number of use cases for open banking-driven financial solutions exploded.
The most innovative developments are currently unfolding in payment initiation, which enables customers to allow third parties to initiate payments directly from their bank account via transfer schemes like Faster Payments, SEPA or Elixir Express. Removing the middleman is advantageous for customer and merchant alike; the latter pays dramatically fewer fees, while the former gains greater security against fraud because they don’t need to provide their card details (which also saves the hassle of typing them in). Given that bank transfers today take 10 seconds, rather than 10 days as they used to, card payments no longer have the speed advantage — putting their future into question.
Meanwhile, account information services continue to find new use cases. In Salt Edge’s early days, AISPs predominately targeted consumers, who benefitted from greater insight into and control over their spending, borrowing and saving habits. Many of Salt Edge’s first clients sought to use data like account balances and transaction history to offer customers access to all their financial data in one app. Today, AISPs are diversifying their customer bases to include groups like private businesses, who enjoy real-time overviews of their finances, and lenders, who can use consumer-requested personal financial data to carry out transparent credit assessments.
Why open banking isn’t all bad news for retail banks
Now that the industry has time to adapt to PSD2, the advantages of open banking for retail banks have also become clearer. With far greater resources than TTPs, banks can combine the swathes of newly revealed customer data with the power of machine learning (ML). By mapping a single customer’s data onto their entire, anonymised customer base, retail banks can make very accurate predictions, especially when they include supplementary data like inflation and market changes in their calculations. Salaries offer a good example: if retail banks can predict how much a customer will earn in the future, they can use this information to suggest retirement or investment plans. The applications for ML are limitless, although good data management will determine banks’ level of success.
How the tech giants could move in
Retail banks are only scratching the surface when it comes to finding use cases for open banking. However, whether they will be the long-term winners is uncertain.
One other stakeholder holds even more influence than banks: the tech giants. While they have yet to successfully compete for significant sections of the value chain, the tech giants are already pushing into retail banking. Apple recently acquired the credit scoring startup Credit Kudos, which could potentially allow it to remove the need for credit cards on Apple Pay and offer buy now, pay later services. I imagine it also won’t be long before we can ask Siri for our bank balance or to transfer money to our friends.
In my opinion, the players that control user interfaces have the most to gain from open banking — and these are likely to be the tech giants, not banks. Bill Gates once said that we do need banking but we don’t need banks; as I see it, the arrival of open banking marks the start of this transition. I believe that our money will always, or at least for a long time, be stored in banks, but consumers will interface with and manage their funds through apps belonging to the tech giants. With their digital expertise and focus on the customer experience, combined with their sheer scale, tech giants pose formidable competition.
Tech giant-driven financial applications would mean a better deal for consumers. Right now, consumers tend to rely on a single provider for the majority of their financial needs, hence the expression “I bank with [insert bank name]”. While it would be much more efficient for consumers to pick and choose the most attractive products from different banks, vendor lock-in often prevents this. In the future, a tech giant like Google may well have an open banking-driven finance app that selects the best current account, savings account, retirement or investment plan from different banks and serves them up in a single solution. In this scenario, banks would likely compete with each other to partner with the tech giants, which could lead them to specialise in specific solutions.
Open banking in the short-term future
In the more short-term future, the greatest change we will see in open banking is the evolution to open finance, which will likely form part of PSD3. Open finance requires different types of entities (not just retail banks) to open up their data, which would give TTPs access to investment services, insurance companies, gig economy platforms and pension providers. From a business point of view, dealing with accounts like mortgages is logistically not much different to dealing with bank accounts, so the underlying technology will have to change little while providing considerable benefits to the consumer.
How banks and TTPs can stay competitive
There are still challenges to overcome if retail banks and TTPs are to really capitalise on developments in open banking. In payment initiation, there have been multiple situations with banks either where they have authorised payments but the merchant hasn’t received the funds, or where funds have been settled on a merchant’s account that were not authorised by the customer. Resolutions in these situations can be tricky. Because TTPs have limited access to information, they can only rely on the payment status response from the bank’s API — the rest is a black box.
The good news is that these issues are not insurmountable. Problems with payments often arise due to issues either with the bank’s API or its core banking and payment processing systems. In order to identify the causes of specific issues and minimise bugs in the payment process, TTPs and banks must thoroughly test their applications with real financial accounts, payment instruments and device/OS combinations. By proliferating the number of institutions, service providers and accounts that can be combined, open banking has simultaneously proliferated the number of scenarios banks and TTPs need to test.
The stakes are high. In the era of open banking, companies that offer consumers the best digital experiences own the future of finance.