The Impact of Open Banking on Fintech Innovation

The financial sector is increasingly embracing open banking and its many opportunities to create innovative personalized customer experiences. As more and more financial institutions (FIs) join the online world, open banking is essential for remaining agile and responsive to the ever-changing needs of clients, consumers, and regulators.

What is open banking?

??????????? Open banking is the system of allowing consumer-permissioned banking data and accounts to be controlled and accessed by third-party applications. Open access to financial accounts is provided through application programming interfaces (APIs), which banks and FIs can use to securely share their data and services with third-party providers such as fintech startups.

Open banking offers a range of benefits for FIs, developers, and consumers, such as opportunities to pursue new business models and revenue streams and co-innovate with third parties to expand their service offerings.?

Secure customer experiences

??????????? Open banking allows users of fintech applications to have a level of control over data sharing. In 2023, Fiserv partnered with Plaid, a financial services company specializing in enabling applications such as Venmo to interact with consumers’ bank accounts. Fiserv’s API-driven AllData Connect allows users of Plaid-powered apps to forgo providing their sensitive banking information like usernames and passwords. “The consumer has the ability to grant and revoke [data] access at an application level,”?says Matt Willcox, Fiserv’s president of digital payments. ??????? ???????????

Competition with fintech challengers and big banks

??????????? FIs are embracing open banking to become competitors against fintech challengers and big banks. One way they are competing is by partnering with complementary Fintechs to expand their offerings. FIs are also increasingly offering Banking as a Service (BaaS) to developers. Simply put, BaaS is the provision of banking products to non-bank third parties.?In doing so, FIs are accessing new distribution channels for banking services and drawing fee-based revenue from a source other than their accountholders. These revenue streams accelerate growth and promote FIs’ expansion into new markets.

Challenges to open banking

??????????? Like any data shared online, there is always a risk of a cybersecurity breach or data misuse by bad actors. A survey of organizations that experienced data breaches found that 74% of them had three API-related data breaches in the past two years. These incidents can permanently damage consumers’ trust and harm an organization’s reputation. Banks that employ a layered security strategy using technology from a trusted vendor are an ideal environment for data sharing.

??????????? FIs must also grapple with different approaches to open banking, which may pose a challenge as they seek to expand internationally. Regulatory-driven markets, adopted in the UK and EU, mean regulators have identified a competition problem in the banking sector and they leverage regulation to open up the market.?Countries like the U.S., meanwhile, adopt a market-driven approach, meaning the market relies on innovation from the private sector to kick-start open banking.

??????????? Open banking has had an indelible impact on fintech innovation. As more financial institutions embrace the opportunities open banking offers, we can expect markets to continue to grow and change at unprecedented rates.