What does the future of open banking look like?
The UK is the current front runner in open banking deployment, but the future for this disruptive technology is still unclear. Predicting the future is always tricky, but there’s already a call for other sectors to follow suit.
Open banking now operates in a fully regulated environment that could revolutionise how we own and use our financial data. As consistent and secure digital identities continue to build trust, what might the future of open banking look like?
What forces are shaping the future?
As the traditional banking model is disrupted, four key factors are shaping how open banking will develop:
- Customer expectations of intelligent services and mobile connectivity
- Connectivity provided by new APIs and cloud infrastructure-as-a-service (IAAS) and platform-as-a-service (PAAS) applications
- Competition from non-traditional players including FinTech and challenger banks providing a range of new services
- The regulatory landscape created by the CMA around PSD2
This paradigm shift from a closed banking ecosystem to an open one populated by aggregators, payment providers, customers and service partners is designed to add value and encourage the development of new business models.
Four potential scenarios for the future
If we accept that predicting the future of open banking is virtually impossible, how are SMEs to strategically plan for the changes in the market? These are four of the potential end states, from the status quo to the diversification of the market and its impact on banking value drivers.
1. Status quo
In the status quo scenario, uptake of open banking remains low and there’s virtually no impact on the banking value chain. Open banking products remain a niche market. The value propositions on offer do not persuade customers and open banking struggles to take hold.
But if open banking successfully challenges the status quo, these are other potential outcomes:
2. Tech giant domination
- Tech companies use their scale and superior customer experience to capture the banking market
- Creation of a compelling customer experience and products using cutting edge technology
- The capture of a significant share of the market
3. Traditional banking dominance
- Traditional banks leverage their inherent advantages and customer trust to develop a range of digital products and services
- They capture the payment sector and collaborate with the biggest merchants with direct integration
4. Financial services revolution
- By leveraging the opportunities presented by PSD2 and open banking, challenger banks and FinTech create a range of new customer-centred financial services
- Vertical integration of financial services revolutionises the retail sector, utilities and telecoms
Traditional banks see tech giants as the real disruptors in this fast-changing sector, but there are challenges for all players:
- Traditional banks will need to develop the agility and modularity to continue to dominate in the value chain by offering better usability and functionality in the front and back end
- Digital-only players won’t suffer the legacy issues of the traditional lenders and have the flexibility to focus on specialised areas of the value chain. However, security and end-to-end control of sensitive data presents an issue
The future may lie in the development of strong partnerships between traditional banks and FinTech startups delivering the innovative products and services SMEs need while leveraging the security and trust of the traditional model.
The future is now
What’s really exciting about open banking for the SME sector is the potential to close the gap between what traditional banks offer, and what SMEs want from their bank.
Innovative FinTech is already unlocking a feature where tools for seamless payments, proactive lending and better financial management satisfies the unmet needs of business customers.
Better account aggregation
If your SME uses multiple accounts, open banking aggregation puts cash flow and debt management at your fingertips.
Smart, SME optimised insights based on a real-time overview of your spending patterns and financial position.
Open banking could lead your SME to specialised financial advice that delivers cost-effective solutions including funding strategies, expense management and loans.
The FinTech app store
Imagine a version of the App Store populated with financial services apps that could meet even the most niche of requirements. Tech giants are experimenting with a similar approach, encouraging third-party developers to create financial service apps that meet the needs of SMEs.
A fundamental change
According to recent research, 39% of banking customers would share their financial data with third parties if it resulted in access to the kind of enriched financial services offered by open banking.
The future looks to be diverse and modular with new players in the open banking ecosystem delivering better business banking and a wealth of financial options for SMEs.