Is Open Banking the Future? Why Is It Significant, What Drives It Forward and Who Is Not Comfortable in Adopting It?

Banks and financial institutions have long been the custodian of people’s money and the torchbearer for any service that would enable the management of money. Not everyone was pleased with the unending list of verifications, validations, manual and automated accounting processes, audits, and regulatory compliance mechanisms that banks followed. But even if it meant a slower or friction-prone service, these factors made banks a more closely guarded entity and this was critical in establishing trust among customers. After all, banks deal with the most important asset of any person – money.

But in the digital era, banks no longer can sustain themselves by hiding inside their fortress and demanding customers to comply with their guidelines. Technology has made customers more empowered and today they value the experience they get more than any other capability a service provider offers, and banks are no exception.

There is now an inevitable shift even in the financial sector as customers expect the same fluidity from their banks, as they would expect from say, online shopping or instant messaging.

To match rising expectations from customers, banks need to turn to technology, the very factor that is empowering their customers to demand more. And when we say technology, it is not the bank’s internal tech that will bring in more success, but the concept of Open Banking. Through secure APIs, banks can open up their core banking infrastructure to 3^rd party businesses as well as Fintech companies to create a more fluid financial ecosystem for customers where all stakeholders can converge and derive returns.

Studies show that Open Banking will have a market size of USD 43.15 Billion globally by 2026. The rapid growth in the Fintech space, coupled with events like the COVID-19 pandemic which necessitated more demand for digital banking services, are some of the key reasons outlined. The rise of Open Banking doesn’t signal the end for banks, but it is a sign of banks slowly adapting to what the market demands and taking a step back in being the face of financial services.

Why is Open Banking Significant?

Tech companies, especially consumer-facing and those in the fintech space, have been extremely successful in creating amazing digital sales and POS channels. What they wanted is data on what customers do and what they would want. This data is with the banks. So, a collaborative approach through Open Banking will let tech companies and 3^rd party businesses form the front-end of banking while major banks sit back and supply the required data on customer transactions and behavior. It is a win-win situation for all. Customers get the best service combined with convenience, banks do not have to worry about managing customer experiences, and tech companies get to leverage powerful financial instruments and data to gain more penetration into challenging markets through informed decisions.

Critical Factors Affecting Open Banking

The growth or decline of Open Banking relies on the entire ecosystem coming to terms with some key elements of digital banking.

Security: Ensuring that financial data of millions of customers is securely managed while in transit across a network of enterprise systems owned by banks, tech companies, 3^rd party businesses, and any other valuable participating stakeholder in the Open Banking economy. It can be achieved through a multi-layered defense approach with intelligent threat detection frameworks in place.

Fraud Prevention: Ensuring that only genuine customer transactions are permitted across the entire ecosystem by fortifying data access channels and carefully eliminating data leakages if any.

Managing Risk: It is essential to ensure that risks associated with Open Banking are well managed by banks in the backend. Numerous elements such as credit ratings, market risks, liquidity, technology risks, and much more can form a risk factor in this scenario. There needs to be a clear and concise agreement with partnering organizations about the risk mitigation policies followed by banks.

Regulatory Compliance: For Open Banking to achieve sustained growth, it is not just the players in the ecosystem but governments and regulatory bodies around the world need to incentivize the technology and remove hurdles in the path of a seamless customer experience. Several countries have made the stride to make Open Banking more accessible by promoting new technological infrastructure in their national financial ecosystem like India with its UPI payment mechanism, the EU and UK with the PSD2 regulation, etc.

Is it all Smooth Sailing for Open Banking?

The answer is certainly no. Major inhibitions exist in the industry worldwide that often drive down the prominence and adoption of Open Banking.

Banks refusing to leave their legacy technology stack in favor of modern agile and API-based extendable systems is one key reason. Security is another major concern when 3^rd party businesses such as fintech companies gain access to financial credentials that have long been only managed by banks and prominent financial institutions.

In fact, studies pointed out that nearly 76% of banks opine that data security will be the key deterrent in the adoption of Open Banking. Regulatory provisions across different countries are the final major hurdle in the adoption of Open Banking. This makes a more acute case when banks have to deal with worldwide operational and integration changes due to partnering with other businesses.

Open Banking will undoubtedly be transitioning into a form of essential banking in the coming years. Despite the challenges and hurdles standing in its path, leaders believe that it will eventually redefine banking to a new age experience that today’s customers desire.