Open banking is big news in the financial industry and is gaining some serious traction – particularly in Europe, where new regulations have come into force this year.
In short, open banking is a movement that is pushing banks and credit card firms to open up their client data in a secure way, allowing third-party developers to build their own applications and services around it using what are known as application programming interfaces (APIs).
The European Union has brought in a specific directive, PSD2, as of January this year. As part of that the UK, which has its own Open Banking Initiative, will see its top nine biggest banks forced to share customer data with third parties if a customer agrees.
The intention is to encourage customers to switch and compare. But experts say it could completely upend the way that we bank, opening up the system to new challengers who can use the shared data to create their own products, and potentially take away from banks’ customer relationships.
“There is a burgeoning regulatory environment for new banks to enter the market and come along with new ideas, and typically those ideas have been ones that are perhaps less about traditional banking and more about helping customers manage their finances,” Paul Dix, vice president of insurance at consultancy CGI, told Corporate Risk and Insurance.
Some have speculated that open banking could lead to tech giants such as Facebook and Google entering the retail banking space.
The CEO of banking platform Bud said in a recent Business Insider report that the tech giants are already eyeing a slice of the pie in the UK, where open banking rules are making headway.
“There are 100% big technology companies looking at how they could play in the market, that's for sure. And there are very big financial brands that are not part of the Big 9 that are looking at the European market very seriously,” he said.
As well as the risk to the status of industry incumbents, who could see new challengers edging into their customer base, open banking presents security risks too.
A McKinsey report, Data Sharing and Open Banking, said that there are “inherent risks in sharing data.”
“It is critical to develop processes and governance underpinning the technical connections,” the report read. “Although the core API value proposition lies in streamlining the systems integration required for data access, the need for guardrails to support protections for the privacy and security of personal data create a formidable infrastructure challenge.”
According to Dix, while open banking could revolutionize finance, ultimately consumers will decide to what extent.
“Whereas maybe 20 years ago, you as an organization could actually dictate the technology that a customer used to interact with you… things have completely turned on their heads now,” he said. “You now have a situation where consumers are driving technology take up, and they will decide the channel that they want to interact with you on, and they will also decide where you fit in their value chain.”