Whether your work in an established financial institution or a challenger FinTech brand, one of the key topics doing the rounds in the industry is Open Banking. So as a decision maker within your field, what do you need to know about this potentially disruptive new force?

What exactly is Open Banking?

The term describes open source software and the underpinning technology that basically allows any developer to create websites and apps for businesses in financial services. An Application Programme Interface (API) is all that is needed to create innovative software solutions that allow banks, third parties and their customers to work in a secure manner.

How did it come about?

Open Banking is a direct response to escalating concerns over minimal – and consolidating – competition in financial services across the EU. Today, just a few key banks operate the finances for millions of EU and UK customers. The governing authorities ruled that a monopoly situation was merging and creating competition barriers within financial services. The UK’s Competition & Markets Authority said that revolution in Open Banking was needed to provide competitive benefits to small businesses and customers alike. Consequently, a new focused working group was created to work with FinTech providers and banks to create the standards, security and APIs that Open Banking applications use to operate. Across the EU, the updated Payment Services Directive was implemented to tackle the same issue.

What is the Open Banking standard

When software is developed, open standards provide guidelines to ensure that new applications operate in an accepted and standardised fashion. In this case, the OBS determines how customer data can be generated, stored, managed and utilised by third-party providers and financial institutions. Its guidelines are available to anyone and developers follow its provisions when creating new FinTech software. As a piece in progress, the Open Bank Standard is expected to be finalised next year.

What opportunities does Open Banking offer?

A potential array of opportunities are now on offer to customers, businesses (especially SMEs) banks and FinTech firms who operate in the cutting edge software development space.

Customer benefits

Increased competition in financial services means that providers will need to offer more competitive deals in order to attract customers. At the same time, consumers can now use apps to gain richer insights into their own personal finance and to access tools which allow them to make meaningful decisions about their savings, daily budgets and debt management. Additionally, greater choice within the banking industry is being complemented by easier and digitally-driven ways to compare providers. With the GDPR now in place, customers will also be able to define how their personal data is used and to retain greater control over it.

Small businesses

Small businesses are able to benefit from similar products being developed specifically for their needs. As an example, the latest wave of digital accounting solutions for SMEs automatically links to business bank accounts via an API to minimise administration and to automate necessary processes as far as possible. SMEs will benefit from lower banking costs, greater choice and exciting new tools that give them greater knowledge and control over their business finances.

FinTech firms

The development of Open Banking greatly supports the UK in becoming a FinTech leader – a national aspiration – and supports the growing industry by allowing smaller providers to compete on a more level platform. Many innovative smaller firms are able to create exciting new products for customers and to successfully chain market share from bigger providers, especially with the millennial generation and forthcoming generation Z who value digital interfaces and self-service. Fintech providers can connect with customers through clever apps that offer speed, efficiency, security and knowledge, building trust in the process and developing reputable brands. These smaller providers also have the flexibility and adaptability needed to adjust to rapidly changing consumer trends.

Banks

Some analysts have felt that Open Banking would end the power of big traditional banks in the modern financial services marketplace. However, those banks which are approaching the same opportunities with their strong position already have customer trust and can partner with smaller high-tech FinTech providers to create value-adding new digital products and services for their customers.

The future of Open Banking

Some critics say that smaller FinTech providers will struggle to generate the degree of trust and reputation that big banks have traditionally enjoyed. With high expectations of the benefits that a digital banking revolution can offer, there is always a danger of a ‘damp squib’ and little meaningful change. However, a recent wave of exciting new products and service launches suggests that progress is being made and that the introduction of PSD2 – requiring banks to give access to third parties for account holder data where the customer consents – will open up further opportunities. Ultimately, growing digital literacy, changing consumer demand patterns, technological innovation and younger markets for financial services products will dictate the need for banking change – and a competitive environment which supports this innovation at a policy-making level will facilitate it where FinTech businesses are hungry for a piece of the banking pie.

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