How Open Banking Is Forging the Future of Finance


How open banking is forging the future of finance

Open banking is on the rise in Europe. A quick search on Google Trends reveals how quickly interest in the term has skyrocketed over the past five years. However, we are only witnessing the beginning of a phenomenon that will revolutionize financial services. There is much speculation as to who exactly will benefit from open banking; My money is with the tech giants — here’s why.

When I founded Salt Edge in 2013, the company’s two products, an aggregation platform and a personal finance management tool, used screen scraping to aggregate customer data. Open banking didn’t exist yet; It was five years before the revised Payment Services Directive (PSD2) came into force. Until then, Salt Edge had no access to banks’ APIs, nor any idea of ​​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 requiring financial institutions to share data with third party service providers (TTPs), PSD2 aimed to increase competition and innovation in the financial services sector, traditionally dominated by retail banks. At first, it appeared that TTPs would benefit the most from the new regulation, as banks were banned from monetizing their APIs and relinquished exclusive control over valuable consumer data. As a result, two types of TTPs emerged: account information and payment initiation service providers (AISPs and PISPs), and the number of use cases for open banking-based financial solutions exploded.

The most innovative developments are currently taking place in payment initiation, which allows customers to allow third parties to make payments directly from their bank account via wire transfer systems such as Faster Payments, SEPA or Elixir Express. Eliminating the middleman is an advantage for customers and dealers alike; the latter pay significantly lower fees, while the former gain greater security against fraud because they don’t have to provide their card details (which also saves on tedious typing). With bank transfers now taking 10 seconds instead of 10 days, card payments no longer have the speed advantage – putting their future in question.

Maps are technology from the 60’s and 70’s. Why carry around a piece of plastic when you can use your phone to authorize a payment?

Meanwhile, account information services keep finding new use cases. In Salt Edge’s early days, AISPs primarily catered to consumers who benefited from greater insight into and control over their spending, credit, and savings habits. Many of Salt Edge’s early customers tried to use data like account balances and transaction history to give customers access to all of their financial data in one app. Today, AISPs are diversifying their customer base to include groups such as private companies, who enjoy real-time views of their finances, and lenders, who can use consumers’ requested personal financial data to conduct transparent credit checks.

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Why open banking isn’t all bad news for retail banks

Now that the industry has time to adapt to PSD2, the benefits of open banking have become clearer for retail banks as well. With far greater resources than TTPs, banks can combine the swathes of newly uncovered customer data with the power of machine learning (ML). By mapping a single customer’s data to their entire, anonymized customer base, retail banks can make very accurate predictions, especially when incorporating additional data such as inflation and market changes into their calculations. A good example is salaries: if retail banks can predict how much a customer will earn in the future, they can use this information to propose retirement or investment plans. The applications for ML are limitless, although good data management determines the success of banks.

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.

How the tech giants could move in

Another stakeholder has even more influence than the banks: the technology giants. While they are yet to compete successfully for significant parts of the value chain, the tech giants are already pushing into the consumer market. Apple recently acquired credit scoring startup Credit Kudos, which could potentially allow it to eliminate the need for credit cards with Apple Pay and offer “buy now, pay later” services. I imagine it won’t be long before we can ask Siri about our bank balance or transfer money to our friends either.

Open banking will give financial institutions a much more accurate picture of people. Social media makes it difficult to predict how people really are because they can manipulate their image and choose what information to share. With open banking, banks have access to data that represents the real, unedited lives of consumers — that’s valuable data. Combine that with the power of companies like Google and the potential is huge.

In my opinion, the actors who control user interfaces have the most to gain from open banking – and they’re probably the tech giants, not the banks. Bill Gates once said that we need banks, but we don’t need banks; In my opinion, the introduction of Open Banking marks the beginning of this transition. I believe that our money will always be kept in banks, or at least for a long time, but consumers will connect to the tech giants’ apps and manage their funds. With their digital expertise and focus on customer experience, combined with their sheer size, tech giants present formidable competition.

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Financial apps powered by tech giants would mean a better deal for consumers. Currently, consumers rely on a single provider for the majority of their financial needs, hence the phrase “bank with me”. [insert bank name]“. While it would be much more efficient for consumers to choose the most attractive products from different banks, vendor lock-in often prevents this. In the future, a tech giant like Google could have an open-banking-powered finance app that selects the best current account, savings account, retirement plan, or investment program from different banks and offers it 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 specialize in certain solutions.

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Open banking in the short-term future

In the more near-term future, the biggest change we will see in Open Banking is the move towards Open Finance, which will likely be part of PSD3. Open finance requires different types of businesses (not just retail banks) to open their data, which would give TTPs access to securities services, insurance companies, gig economy platforms and pension providers. From a business perspective, handling accounts like mortgages is not much different logistically than handling bank accounts, so the underlying technology needs little change while offering significant benefits to the consumer.

How banks and TTPs can remain competitive

There are still challenges to be overcome if retail banks and TTPs are to really benefit from developments in open banking. When it comes to payment initiation, banks have had several situations where they have either authorized payments but the merchant has not received the funds, or funds have been settled into a merchant’s account that were not authorized by the customer. Solutions in these situations can be difficult. Since 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 problems are not insurmountable. Problems with payments often arise due to issues with either the bank’s API or their core banking and payment processing systems. To identify the root causes of specific problems and minimize errors in the payment process, TTPs and banks need to thoroughly test their applications using real financial accounts, payment instruments, and device/operating system combinations. By increasing the number of institutions, service providers and accounts that can be combined, Open Banking has simultaneously increased the number of scenarios that banks and TTPs need to test.

It’s about a lot. In the age of open banking, companies that offer consumers the best digital experiences own the future of finance.

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