What is open banking?
It would be no surprise if you do not know the answer, as mobile and open banking are relatively new terms when compared to the history of banking. According to Investopedia, open banking is "a banking practice that provides third-party financial service providers open access to consumer banking, transaction history, and other financial data from banks and non-bank financial institutions through the use of application programming interfaces”.
There are still many open banking initiatives taking place. Perhaps, you’re more familiar with the first concept - mobile banking. It would be difficult to find someone who doesn’t have at least one banking app on their phone. The surge of independent platforms began with the rise of fintech companies, transforming the industry to bring about faster, more reliable, and user-oriented banking services. In Europe alone, the fintech sector was valued at $20.4 billion in the first quarter of 2018. All of this supports the open banking framework.
In 2015, the European Parliament passed the PSD2 directive. It came into effect in 2018, and has since shifted the European banking scene, while giving more power to consumers. Before the directive, traditional banks had a monopoly over consumer data. Yet, with recent changes, users have more power over their accounts, therefore, choices. People can choose where to put their money and which services to use. Banks are just becoming an infrastructure for accumulated wealth instead of controlling consumers and their funds.
However, the hype around mobile apps, that can process regular financial procedures much faster than traditional banks, has brought with it new challenges. Not only were consumers fascinated by new possibilities, but emerging companies as well. It resulted in hundreds of new startups entering the scene and flooding the market. Most of them weren’t much different from one another. They all offered fast and secure performance - competing only by increasing, for instance, withdrawal limit or designing a more intuitive dashboard.
As a result, consumers ended up jumping from one app to another, managing several different accounts. And juggling between profiles is not just inconvenient. Having money on more than one app could increase the risk of losing funds due to unnoticed money “leaks.” In addition, imagine if you have to pay monthly fees for all those providers. It was clear that something had to be done.
PSD2 Paves the New Era of Banking
The PSD2 directive opened banks for more user-friendly services. Now, financial organizations have to give users' account details to the qualified (meaning regulated) third parties if the user gives their permission. The process works through open APIs (application programming interface). The API ensures higher security standards as the data you share as a user is encrypted and monitored with certified security and data privacy regulations.
Therefore, the directive makes banking more convenient for consumers, as they don’t have to create additional accounts or handle operations via the bank, and access more security through enhanced security measures.
PSD2 also benefits new players by easing the way to enter the market. Services don’t need to struggle with having to encourage consumers to open an account on their platform as they can do that by linking to the existing profiles.
Recent regulations also inspired OSOM. New legislation empowered OSOM to look into how we can aggregate bank accounts to make daily financial management easier. Under the strict regulation of the National Bank of Belgium, we strive to bring you an experience that takes you beyond banking and into a great financial management experience.
PSD2 to increase the growth of fintech
Although competition is already fierce, it will most likely change course. Instead of new companies promoting yet another account, they will focus on improving the user experience and creating the perfect bouquet of services for each consumer so they can have what's most relevant to them and nothing more. As a result, we could see growth of companies that provide a specific product, such as token integration. Instead of fishing for new accounts, they will master particular features, such as payments or withdrawal limits.
PSD2 to accelerate modernization
We all know that traditional banks fall behind when it comes to innovation. However, digitization is a requirement to stay relevant in today's financial landscape. Consumers demand quick service, excellent customer support, and comprehensive navigation.
In his article “Open banking opens greater value”, John Hallsworth, open banking global network lead at KPMG, wrote, “Customers are looking for easier, more seamless and intuitive value-added banking experiences and there are a growing number of fintechs and ‘challenger banks’ seeking to capitalize on these developments.”
It won't happen overnight, but the opportunity for new types of financial institutions is here, and by building OSOM, we want to change the way you manage your money.
Open banking to produce higher data privacy standards
Data breaches are crimes that are on the rise, and a troubling issue when it comes to information aggregation. However, the PSD2 directive encourages service providers to guarantee higher security checks and data protection. Regulation and security policies will evolve, and companies will be urged to adapt accordingly.
Traditional Banks in the Face of Open Banking
While startups and consumers may be celebrating the new standards, traditional banks aren’t as excited. Before the directive, they had a monopoly on consumers’ data, and once they obtained the information, it meant that the consumer belonged to them, with fewer options to choose other service providers. Following PSD2, it no longer matters whether they landed a client or not; the same person can be using ten different services at the same time.
It’s better for consumers who don't have to think about brand names of the underlying providers so much and will be able to switch faster, but banks see it as a risk. The smart ones are already thinking about how to adapt. They will either have to figure out a way to build a better customer experience, or they'll go the way of utilities companies and provide "banking as a service" to other financial players, focused on maintaining a good platform and excellent compliance.
Banks won’t only be rivaling with fintech startups. They will have to face a much broader spectrum of competition. For example, even Facebook, with its new Libra currency, or Amazon, can become potential competitors.
Despite the influence over lobbying and the market, traditional banks can’t stop the evolution and digitization of the ecosystem. What we are now seeing is just how the financial sector is meeting consumer demands rather than appeasing big players.
Although the PSD2 directive was a recent development, we can already see new trends rising and challenging the traditional banking model. So, is open banking paving the way for a new era of money management? Definitely. With a faster and more reliable service, we can achieve better user experience and bring more awareness of how we do approach finance.