With the rise of new technologies and innovative financial services, how we pay for goods and services is rapidly evolving. Open banking is one of the most exciting developments in the world of payments. But what exactly is open banking, and how will it impact how we make payments?
What is Open Banking?
Open banking is a financial concept that promotes the sharing of financial information between various financial institutions and authorized third-party providers. It is enabled by application programming interfaces (APIs) that allow the secure access and exchange of consumer data. Open banking is based on the principle that individuals or businesses should have greater control and ownership over their financial data.
Traditionally, banks have monopolized financial data (e.g., bank account balances, transaction histories, etc.) by limiting who they share this information with. Open banking changes that by equipping individuals and businesses with the ability to share their data and payment details with other financial services providers, such as budgeting apps, investment platforms, and more.
The development of payment APIs has made open banking possible. APIs allow software programs to interact with each other and, in this case, enable third-party financial service providers to access customer data securely and efficiently.
Growing interest and widespread adoption of the technology led to more than 100 billion open banking API calls in 2023, which is expected to reach 580 billion in 2027. Open banking transaction values are also projected to increase by more than 500% during the same time period, rising from $57 billion in 2023 to more than $330 billion in 2027.
With the development of payment APIs, open banking is changing how we think about financial management and paving the way for a more customer-centric financial ecosystem.
Benefits of Open Banking
The most significant benefit of open banking is that it improves the customer experience. By enabling third-party service providers to access consumer and business financial data, open banking opens up new possibilities for personalized and innovative financial products and services. Consumers and businesses can access a wider range of financial offerings, and providers can tailor their services to meet individual needs and preferences.
Another benefit of open banking is increased competition among financial institutions (FIs). In the traditional banking model, individuals and businesses are often locked into a single bank for their financial needs. With open banking, consumers and businesses could easily switch between financial institution providers based on the desired value-based services, which forces financial institutions to compete for their business. This competition can drive down costs and improve the quality of financial products and services that financial institutions offer to their customers.
Open banking also offers better financial management for both consumers and businesses. By providing access to real-time financial data, consumers can make more informed financial decisions and better manage their money. Open banking can streamline financial processes for businesses, enabling more efficient cash flow management and faster payments.
Increased adoption of open banking breeds innovation for consumers and businesses, resulting in solutions to address technology challenges, including concerns over security, increased regulatory compliance, and expansion into more use cases. As open banking continues to evolve, we can anticipate even more benefits emerging, such as improved financial inclusion, increased access to credit, and simplified international transactions. Open banking holds the potential to transform the financial industry, benefitting customers and fostering innovation and competition.
Key Trends in Open Banking
One of the most significant open banking trends is payment APIs, which we briefly mentioned earlier. Payment APIs enable secure and efficient connectivity, data exchange, and functionality between banking systems and external applications. With 87% of consumers connecting to open banking-powered apps, consumers are increasing mobile banking usage and causing businesses to create additional use cases around open banking technology. This has opened up many new opportunities for innovative financial products and services, such as budgeting apps, investment platforms, payment automation, etc.
Another trend in open banking is the collaboration between banks and fintechs, where traditional banks partner with fintech companies to leverage their technology and expertise. This collaboration enhances the range and quality of services offered to customers, promoting industry-wide innovation and ensuring customers have access to cutting-edge financial solutions. In the payment services industry, for instance, new innovations enable automation, faster payments, and customizations all through payment APIs. Additionally, partnerships between financial institutions, fintechs, and other third-party solution providers have resulted in 60% of financial institutions already meeting the digital banking needs of their consumers.
Regulatory developments are also shaping the open banking landscape. While the United States lacks a comprehensive regulatory framework, initiatives from the Consumer Financial Protection Bureau (CFPB) and the Consumer Financial Data Rights (CFDR) group are actively working to establish industry standards. They aim to ensure consumer protection, data privacy, and security, similar to the EU's Payment Services Directive 2 (PSD2), which has set a global precedent for open banking regulations.
In October 2023, the CFPB proposed the Personal Financial Data Rights rule to improve access to financial data and encourage competition across financial products and services. Through this rule, consumers would have a legal right to share their data and easily switch financial institutions. It would also provide consumers with access to data at no cost. Financial institutions and consumers would benefit from enhanced protections to prevent unchecked surveillance and misuse of data, a right to revoke access to consumer data, a shift away from risky data collection practices, and fairness across industry standards.
Payment automation is another emerging trend in open banking. This technology enables automatic payments without manual intervention, saving time and reducing the risk of errors. Both consumers and businesses stand to benefit from the convenience and efficiency of payment automation solutions. Broadly, adopting artificial intelligence (AI) in banking and financial services is expected to enhance the user experience, increase revenue potential, improve decision-making processes, and optimize business operations.
Open banking is revolutionizing financial management and fostering a more customer-centric ecosystem rooted in security and innovation. Payment APIs, collaboration between banks and fintechs, expanding regulations, and payment automation are just a few of the trends propelling this transformation. As open banking continues to evolve, we can expect even more innovations and improvements in interacting with financial services.
Open Banking and Payments APIs
As we've discussed, payment APIs are a key enabler of open banking. They allow third-party payment service providers to securely access customer financial data, enabling them to create innovative financial products and services.
Through open banking, payment APIs allow third-party payment service providers to initiate electronic payments from a user's bank account without requiring a credit card or other payment intermediary. Payment APIs improve customers’ and businesses’ digital payment experience by enabling faster payments with lower transaction fees.
Payment APIs and open banking are a response to the high demand for credit card alternatives. Many consumers today prefer to pay straight from their bank account rather than using credit and dealing with the risks of borrowed funds. Projected to surpass $200 billion in volume by 2027 for consumer purchases made at the point of sale, account-to-account (A2A) payments (also known as pay by bank payments) are a primary feature of open banking, challenging credit card payments.
Think about the number of payment apps created in the last few years that enable customers to purchase directly from their bank accounts. From Venmo to Instacart and beyond—these shopping and online payments apps all leverage payment APIs to initiate payments and provide customers with a seamless and convenient payment experience.
Payment APIs are a crucial component of open banking and drive payment innovation across the financial sector. With the increasing adoption of open banking, we can expect to see even more payment APIs and innovative payment solutions emerge in the years to come.
The Future of Open Banking
Where do we think open banking is headed in the next five years? Looking ahead, the possibilities are endless. Open banking is still in its early stages, and we're only beginning to scratch the surface of what's possible. Still, open banking will be pivotal in enhancing payment processes and online transactions conducted through claims management software.
One area where we're likely to see significant growth is in the use of data analytics and AI. With access to real-time financial data, payment service providers can use advanced analytics and AI algorithms to gain deeper insights into customer behavior and preferences. This helps payment providers create more personalized and targeted financial offerings that meet individual needs and preferences and can ultimately increase customer satisfaction.
Another potential growth area is the expansion of open banking into new markets and industries. Open banking is not limited to the financial sector; it has the potential to transform a wide range of industries, from healthcare to energy to retail. As more businesses and industries adopt open banking, we expect to see even more innovative use cases and applications emerge.
Finally, we anticipate continued regulatory expansion in the open banking space. Regulators are recognizing the benefits of open banking and are taking steps to promote its adoption and growth. This includes expanding existing regulations and introducing new ones to encourage competition and innovation in the financial industry.
The future of open banking is exciting and full of possibilities. It is changing the way we think about payments and financial services.
From faster payments to improved data security to greater consumer choice, open banking is transforming how we interact with financial services and opening up new possibilities for businesses and consumers alike.
Looking to learn more? Read the latest Financial Tech Times article from our CEO, Dave Glaser: Unlocking Efficiency and Security: The Importance of Open Banking for A2A Payments