- Open banking is a system under which banks open up their application programming interfaces (APIs) for third parties to develop new apps and services.
- Open banking offers incumbent banks the the opportunity to partner with fintechs rather than compete with them.
- Do you work in the Banking industry? Get business insights on the latest tech innovations, market trends, and your competitors with data-driven research.
Open banking is proliferating technology within digital banking around the world, forcing banks to change their business models. Instead of competing directly against fintech and third-party institutions, incumbents can leverage open banking to partner with them instead, and thereby remain competitive in the rapidly evolving industry
Open banking has the ability to transform how incumbents interact with not only fintechs and each other, but with consumers as well. We outline exactly what open banking is, and describe what financial institutions stand to gain by adopting it.
What is open banking?
Open banking is a system under which banks open up their application programming interfaces (APIs), allowing third parties to access financial information needed to develop new apps and services and providing account holders greater financial transparency options. And this system is set to shake up the financial experiences for customers across the globe – in a good way.
While open banking allows third parties to develop better personal finance management (PFM) applications, it places pressure on incumbents to improve their own offerings. Open banking services cultivate competition in the banking industry – forcing incumbents to either enhance their financial services or partner with fintechs.
What is a banking API?
APIs are a set of codes and protocols that decide how different software components should interact – they essentially allow different applications to communicate with one another.
According to The Monetization of Open Banking Report from Insider Intelligence, APIs have been used to connect developers to payment networks as well as display billing details on a bank’s website. Through open banking, APIs are now being used to issue commands to third party providers.
APIs are also necessary for the functionality of Banking-as-a-Service (BaaS) – a key component of open banking. BaaS is an end-to-end process that connects fintechs and other third parties to banks’ systems directly through the use of APIs. It helps to build up banks’ offerings on top of financial providers’ regulated infrastructure.
Like what you’re reading? Click here to learn more about Insider Intelligence’s leading Financial Services research.
Open banking examples
BBVA: In 2018, BBVA launched its BaaS platform, Open Platform, in the US. Open Platform utilizes APIs that allow third parties to offer customers financial products without needing to provide a full suite of banking services.
HSBC: HSBC launched its Connected Money app in May 2018 in response to the UK’s open banking regulations that attempt to place more control of financial data into the hands of consumers. Connected Money allows customers to view various bank accounts as well as loans, mortgages, and credit cards, in one place.
Barclays: Flaunting its success in the open banking market, Barclays claims to be the first UK bank to enable account aggregation inside its mobile banking app. Its open banking feature allows customers to view their account with other banks within Barclays’ mobile app.
Benefits of open banking
Open banking has the potential to increase revenue streams while expanding customer reach for financial institutions – an opportunity incumbents shouldn’t ignore. It can also create revenue-sharing ecosystems, where incumbents give customers access to third-party-developed services while profiting from a subscription or referral basis.
Insider Intelligence projects the revenue potential in the UK generated through Open Banking-enabled small- and medium-sized businesses (SMBs) and retail customer propositions to reach $2 billion by 2024 – a 25% compound annual growth rate (CAGR).
Additionally, open banking allows banks to commercialize their infrastructure by moving into the BaaS space and providing core services to fintechs and other third parties.
Open banking trends
With the fast-growing demand for financial services, incumbents are in constant competition with fintechs – but open banking offers them the opportunity to combat these pressures by instead partnering with them. Open banking is transforming relationships between incumbent institutions and their customers by shifting the narrative that customers themselves should have ownership of transactional data instead of their respective financial institutions.
Open banking regulation
Because the outcome of open banking is ultimately competition, many financial institutions (FIs) have been reticent to take action; therefore, regulators have been the key driver of open banking’s spread. In the UK, where open banking has taken off, regulation mandated the nine largest retail and small- and medium-sized business (SMB) account providers use open APIs to allow authorized TPPs to access customer-permitted data and initiate payments on behalf of clients.
In countries with less developed open banking regulations — including the US, Japan, and Canada — the opening of banking services is likely to continue inching forward, driven by customer demand and competitive pressure. While in areas with advanced open banking regulations — like the UK, EU, and Australia — these services will continue to catch on quickly