Learning From The Evolution Of Open Banking

March 22, 2023

Open banking has gained significant traction in recent years as a transformative concept in the financial industry. The pandemic has accelerated this adoption even further, as evidenced by the increased popularity of neobanks and alternative financial services aiming to enhance the digital banking experience.

According to a report by Polaris Market Research, the global open banking market size was valued at $16.14 billion in 2021. However, is projected to reach $128.12 billion by 2030, growing at a CAGR of 26.8% during the forecasted period. Polaris’ research highlighted the Asia region as the one that will experience the most growth over the forecast period.

Retrospectively examining its definition, open banking—also known as open banking data—is a banking practice that gives third-party financial service providers (frequently tech startups and online financial service vendors) access and control over a consumer’s personal and financial data. This includes their transactions and other financial data from banks and non-bank financial institutions, accessible via application programming interfaces (APIs).

Start Of A Revolution: Europe

In several parts of the world, the concept of open banking has been actively welcomed. Always with regulatory bodies shaping the frameworks and governing policies around open banking, creating the path for further adoption. Europe, with the European Central Bank’s (ECB) amendment of the Payment Services Directive (PSD2), has been recognized as one of the catalysts for the global standard of open banking asides from the U.K.’s Open Banking Standard.

The first PSD (PSD1) was first enacted in 2007, introducing a new industry category of cross-border payment services. Also allowing nonbanks to securely provide financial services. The updated PSD2 was officially enacted in 2018 to adapt to the digital revolution in the financial sector. The ECB’s main objectives for PSD2 are to support innovation and competition in retail payments, enhance the security of payment transactions and protect consumer data.

This directive outlines several requirements, with one requiring payment services providers to provide a standardized and reliable access interface to payment accounts (i.e., an application programming interface, API). The aim is to be able to accommodate cross-border transactions by minimizing the API standards, enabling secure transactions and exchange of information between all parties involved.

Continuing The Movement: Asia

Several countries in Asia have followed suit with their initiatives to develop open banking. For example, in India, many companies focus on improving financial inclusion for the large unbanked and underbanked population. Some of the government’s multiple initiatives were their biometric digital ID system Aadhar Stack in 2010, followed by the United Payments Interface (UPI) in 2016. This allowed the general public to access bank accounts and execute transactions via authorized third parties using API protocols. In 2021, the Reserve Bank of India (RBI) launched Account Aggregators (AA), a framework that creates consent managers and allows consumers to take control of the data provided to financial service providers.

Conversely, Singapore has become one of the pioneers in setting what is known as “the golden standard” for regulatory guidelines in the region. The Monetary Authority of Singapore (MAS) released an API playbook providing guidance for firms interested in adopting open banking.

In 2018, MAS also led the establishment of API Exchange (APIX). It is an initiative jointly formed with the World Bank Group’s International Finance Corporation (IFC) and the ASEAN Bankers Association. It is an across-border, open-architecture platform with a global marketplace that helps financial institutions and fintech firms connect.

A Late Adopter: The United States

Despite the fact that the United States is home to many globally renowned fintech companies, the adoption of open banking has faced major roadblocks. Lack of proper government support, a highly fragmented banking system and the absence of a strong set of regulations to protect data privacy have been attributed to why many financial institutions are disinclined to support this movement.

However, in July 2021, President Biden signed the Executive Order on Promoting Competition in the American Economy, urging the Consumer Financial Protection Bureau (CFPB) to progress the creation of regulations supporting open banking in a more secure manner. The regulation would give customers the right to port their data from one bank to another, aiming to facilitate consumer-friendly innovation in financial services markets.

Source: Learning From The Evolution Of Open Banking.