Written by Seshika Fernando, General Manager, Open Banking, WS02
2021 will be characterised by volatility and uncertainty as financial institutions navigate the economic and social impacts of COVID-19. The pandemic has delivered a systemic shock unlike anything seen in the modern era and this will reverberate across banking institutions and financial systems. Open Banking is becoming a strong driver within the financial world and it has the potential to enable communities and individuals to make informed financial choices as they recover from the pandemic’s impacts. From the evolution of open banking standards to how banks may approach open banking as a tool to achieve business goals, there are strong signs that the coming year will see open banking become a strategic enabler for financial institutions and the communities and individuals they serve. This drive will also prompt high demand for the connecting interfaces/APIs that power open banking and that will help to build an ecosystem that features a large range of diverse stakeholders from traditional banking and fintech to third party innovators.
The following are the trends we expect to see emerging or consolidating in 2021.
Trend 1: Financial institutions shift from compliance-driven adoption of open banking to a key driver of business strategy.
As progressive proponents of open banking are beginning to reap commercial benefits, more institutions will realise that there is more to open banking than compliance. Open banking can and should be a journey towards digital transformation, especially for banks looking to improve consumer experiences. This will usher in more focus on solving consumer problems and integrating them into the fintech ecosystem. It will help create higher-value offerings through partnerships, and cut costs, in a challenging business climate.
Trend 2: We’ll see further movement towards a common core for standards globally
Open banking standards are largely evolving from a common denominator – the open banking standard in the UK – and there is a lot of commonality across jurisdictions. This is a big potential opportunity for fintech firms to develop cross-border services that serve a highly mobile client base unbounded by geographical restrictions. Regulators are already considering cross-border interoperability in looking at the future evolution of open banking as seen with the second Farrell Review on the Consumer Data Right in Australia and with New Zealand’s proposed Consumer Data Right. Similar moves are inevitable in mature open banking markets in the UK and the EU as they look to promote international trade and business and improve consumer experiences.
Trend 3: COVID-19 drives need for greater financial literacy and flexibility provided by open banking
The millions of people affected economically by COVID-19 need information and flexibility to help make better financial decisions on loans, investment and savings products that will give them better outcomes as they try to recover. The pandemic has truly heightened the need for an ecosystem approach that goes beyond single institutions and helps consumers access and evaluate alternatives across the whole spectrum of products and services.
There must be greater visibility provided of the different options that people can access to help get back on their feet. This could be sub-prime lending, alternative lending, switching to a better product or investing in a different way that suits their current position and desired future state. Open banking enables third parties to create applications that give users a fuller understanding of their position and actions to take – this couldn’t be delivered by a single bank – and this will be very valuable to consumers. It is part of a broader drive towards data-driven decision-making for consumers across markets – a move that goes from “open banking to open finance to open life”.
Trend 4: US financial regulators will start to “catch up” with the market where industry-driven standards have seen wide adoption
The complexity of the US financial regulatory framework means we have not seen the same regulator-driven leadership to establish open banking standards as we have seen in other markets like the UK. In this vacuum, the initiatives like the FDX API standard developed by a diverse group of industry players have filled the gap in terms of providing a common language for secure, permissioned data sharing, recording impressive traction with 12 million users already. But regulation is starting to catch up, with the Consumer Financial Protection Bureau (CFPB) announcing in October an advance notice of proposed rulemaking. This is the first step to creating formal open banking regulation in the US. As it has with other markets, we expect that the U.S. government will codify and build on the industry-defined standards that are working today.
Connecting the open banking ecosystem
Underpinning all these trends will be demand for connections between ecosystem players: banks, fintech firms and other third parties. The way to do that is to build good interfaces and those interfaces today are APIs. APIs have to be great, otherwise fintech firms will not consume these consistently enough to deliver business results for the bank.
The challenge is to be able to create the right APIs and then to ensure they are reliable, discoverable, usable, high-performing and flexible to offer long term value to both API consumers and their end-consumers. Banks will need the right technology, the right partners, and the right kind of commitment in implementing a robust digital strategy as it looks to move past the often-difficult early stage to build strong adoption across the ecosystem.