You don’t need a crystal ball to predict that the world is moving towards open banking. Some markets, led by the EU and the UK, have already taken the lead by creating and passing their own open banking regulation. Other markets, such as Australia, Canada, New Zealand, Mexico, Argentina, Nigeria, Hong Kong (SAR), Japan and Taiwan (jurisdiction), for example, are also moving in that direction.

At the same time, there are a growing number of markets where — even absent of regulation — open banking is taking hold. In the US, for example, the complexity of the federal financial regulatory system means there is little potential for federal-level open banking regulation any time soon. Yet some of the greatest activity in open banking is happening in that market as players vie to find new ways to deliver new and compelling customer experiences.

Open banking goes global

Over the coming few years, we expect to see a rapid uptake of open banking approaches and models as people become more aware of the benefits it could bring consumers and small to medium enterprises (SMEs) — the ability to quickly understand their financial position, explore alternatives and make better financial decisions. Catalyzed by regulation, banks in Europe, the UK and Australia are already hard at work testing and prototyping new use cases and operating models that leverage application program interfaces (APIs) and open banking principles, such as comparison services, know-your-customer, auto savings and credit scoring to name a few. As these use cases are commercialized into functional solutions, the lure of open banking will grow (both for banks and for consumers).

 

At the same time, we expect to see customer demand and shifting expectations drive increased adoption of open banking models, even where regulation doesn’t explicitly require it. 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.

As these new offerings start to influence customer expectations — and as customers start to understand and assess the value of their data — many banks will have little choice but to shift towards more open models (if only to reduce the friction between ecosystem partners) as they strive to offer better customer experiences.

Balancing the risks

Of course, there will also be the continued stick of regulation. As Scott Farrell — the author of Australia’s Review into Open Banking report — notes in a recent KPMG Australia publication, Get Set for Open Banking, “There is a strong desire to move relatively quickly — and we should expect to see a number of new jurisdictions implement open banking within the next 2 years.”1 Indeed, the trend now emerging in some markets, particularly the UK and Australia, is to extend customer right to data across multiple sectors including insurance, utilities and pension data. While consumer ‘ownership’ of data will be a central component, each jurisdiction will take its own distinct approach to open data regulation in each sector. The challenge facing policy makers and regulators is how to structure an open banking regime that balances the need for innovation, information security and privacy, and does not inadvertently create an uneven playing field for both traditional and non-traditional players. In the EU, the balance seems to be in favor of the nontraditional players: with the proper consents, banks are required to open up their customer data to retailers, for example, but banks are not able to access retailer’s customer data. This not only creates an imbalance of information, it also dampens the desire for innovation in the banking sector.

Grabbing the low-hanging fruit

While this has made open banking a compliance headache for many, we still expect to see banks start to get serious about finding the value in open banking in the near-term. Many will be rolling out new capabilities and applications designed to make consumers’ lives easier (and their digital assets ‘stickier’). Expect to see a plethora of new tools emerge — solutions like personal financial management platforms that aggregate spend data across users’ various banks, loyalty programs and payment platforms in order to provide insightful investment and financial advice. Also expect banks to become savvier in the way they source and analyze data in order to gain better insight into customer activity and interactions. The reality is that the key to profitability (in the banking sector, at least) still rests in the bank’s ability to fulfil a greater number of their customer’s needs (whether through the bank itself or other third parties). Open banking has the potential to help banks know much more about their customers’ patterns of behavior, financial health, investment plans and goals; the challenge for banks will be in convincing their customers of the value in sharing their data.