Open Economy Insights: A digital shift from Open Banking to Open Finance

Introduction

With the world evolving and taking a user-centric approach, there has been an increased focus on protecting user rights and increasing user?control over their data to foster a transparent and accountable economy.

We see a similar uptrend in the financial sector through open?banking?and open?finance.?Open banking enables the usage of APIs, allowing?for?a regulated manner of information sharing only with customer consent. Open?Finance is said to be?an extended version of?Open Banking,?extending to all financial products and services and not just banking, eventually resulting in a much more comprehensive?execution of the initial vision.

Open Banking focuses mainly on AIS and PIS services since there has not yet been a framework established for Open Finance that provides an opportunity for the stakeholders involved to ensure the maximization of customer value and control and improve economic outcomes.

The open banking segment had a valuation of USD 54900 million in the previous year, and with a rapid CAGR of 46.94%, it is expected to reach USD 552620 million by 2028.

Consumer awareness and adoption are steadily increasing. A 2023 survey by PWC found that?almost?75% of consumers are willing to share their data.

There is a disparity in the adoption rates seen across generations; 41% of those under 24 have changed banks and accounts compared to 25% of 25–35-year-olds. About 33% of young British adults have made open bank payments, while there is a lack among those above 55.?

In the US, almost 49% of consumers use three or more fintech-powered apps, up from 36%. 68% of consumers encourage faster onboarding and?recommendations.

Market Challenges and Opportunities

Opportunities for open finance would?center?around the services being provided, leading to?stimulus?in the economy and financial sector?through increased competition.

There are benefits for both financial service providers and consumers. Consumers benefit through the creation of tailored products and services; there is no?single monopolist in the economy due?to the existence of multifold options, effective assessment of creditworthiness, and realistic projections of current and future scenarios, leading to consumers' making aware and comprehensive decisions.

Service providers benefit from the availability of data sharing and aggregation possibilities, increased attraction of a new consumer base, increased opportunities for cross-selling, a holistic understanding of consumer needs to provide solutions that are beneficial for them, and effective wealth management and lending.

Challenges revolve around the risks of sharing data, efforts to disintermediate, and data privacy?concerns. Service providers face API-related operational risks, cybersecurity concerns, increased barriers of entry to the industry, changes in the existing financial markets sector, and a lack of standardization in the ecosystem.

Similar to open finance, the open banking industry faces concerns revolving around a lack of openness from consumers to this segment, the rapid expansion of fintech dominating all other banking products?and services, and decreased interpersonal relationships with consumers. Advantages revolve around the creation of customised products that benefit the real needs of consumers, the diversification of products leading to the growth of the financial sector, and the movement from a siloed structure and environment to an integrated and centralised system.

The biggest?challenge is to

• Ensure that the security and privacy of consumer data are not compromised.?
• As they are quite new?concepts, there is a lack of regulation across different jurisdictions.?
• These are successful if?consumers?are willing to share their data with TPPs.

The significant opportunities are

• Growing consumer demand for control over their data, which is offered by open banking and open finance
• The rise of?APIs,?data analytics, and cloud computing is providing the technological?foundation?for open banking and open finance to thrive.

There are opportunities for

• Consumers?and government officials?who seek to gain control over their data; individuals who look to improve literacy.
• Financial institutions and TPPs seeking to expand products and?reduce?reliance on?traditional?data sources

Market Trends

Trends in open?banking?and open finance?revolve around the increase in demand in the fintech, telecom, retail, and bank segments. Consumer-centered diversification, expansion, and integration are the driving forces behind the ecosystem.?

We can expect an uptrend for services tackling “the need of the hour," concerns relating to the cost of living, increased support for small businesses, open finance services, the need to fight fraud,?expansion across borders, the need for variable recurring payments, the integration of Web3 technologies and decentralisation, the existence of global security standards, and a collaborative banking approach. Trends in open finance?revolve mainly around its ability to create products and services that are inclusive, integration between multiple industries,?robo-advisors, budgeting tools, affordability assessments, account top-up payments, e-commerce, and A2A apps

a.?Consumer awareness and adoption are steadily increasing. A 2023 survey by PWC found that?almost?75% of consumers are willing to share their data.

b.?Inclusion is being promoted through open?banking and?finance, providing micro-lending and mobile banking.

c.?Ground for entrepreneurial?opportunities and ecosystems

Market dynamics and segmentation

Fin-tech, startups, and businesses that emphasize financial inclusivity come in second and third, with the capital market segment making up 30% of the open banking segment and the banking channel accounting for 25%. Leading players in this segment include Banco Santander, Wells Fargo, HSBC, and more.

The open banking segment had a valuation of USD 54900 million in the previous year, and with a rapid CAGR of 46.94%, it is expected to reach USD 552620 million by 2028.

The segmentation by type includes cloud, on-premises, and hybrid applications, which are extended to banks, fintech, institutions, and retail. The highest segment is off the app market, accounting for almost 2/5th?of the market share. Asia-Pacific regions come in second place, with Europe having the highest market share.

There is a regulation-driven approach persistent in the UK and EU, while places such as the US are market-driven.

Segmented unto

• Card Payments: Most widely used
• Mobile Payment:?NFC, QR, and?P2P payments are also gaining traction.
• Direct Debits: Recurring payments directly from the bank account
• SEPA: Single Euro?Payments Area, dominated by Euro Payments

Business Model

There?have?been a plethora of models deployed to tap into the industry.?One?model is the distribution model, in which banks partner with fintech companies utilising APIs; the second is the marketplace model, which enables banks to separate the processes of production and delivery, allowing for a revamped value chain; and the third is the BaaS model, wherein?financial?institutions provide banking processes to non-banks through regulated infrastructure. While the distribution model is customary, there has been an increase in the usage of other models as well

• a.?Business Description: Providing personalised financial?services?to consumers. Financial?data from consumers is collected and used to provide personalised financial advice, budgeting?tools, and recommendations.
• b.?Target Customers: Identification and onboarding of target customers. Customers who are interested in taking control of their finances, such as those who are tech-savvy and comfortable using online and banking tools,.
• c.?Channels: Different?channels,?such as partnerships and marketing,??will be used to get customers and businesses onboard.
• d.?Revenue Stream: The revenue will be generated from a variety of sources, including subscription fees, transaction fees, and?data monetization.

Target Audience

There is a disparity in the adoption rates seen across generations; 41% of those under 24 have changed banks and accounts compared to 25% of 25–35-year-olds. About 33% of young British adults have made open bank payments, while there is a lack among those above 55.?Thus,?there is a need to provide authenticity and focus on generating value for consumers while tapping into relevant mediums of communication that work best for varying age segments. There is also an increase in the adoption of services that are demystified to consumers, as there is a rhetoric being pushed about data leakage.

In the US, almost 49% of consumers use three or more fintech-powered apps, up from 36%. 68% of consumers encourage faster onboarding and?recommendations.

Future growth and conclusion

There can be a significant expansion in the industry that can be generated through a focus on consumer behavior and preferences and by tapping into the experiences that consumers need. There is a need for a connected ecosystem that can be achieved through open banking. How well the service providers can integrate several sectors that are not linked directly to banking or financial products will determine the growth and development of the industry. Success can be measured through the level of innovation, costs involved, growth of the number of users and ecosystem, the methodology of resolving issues, and the development of regulatory frameworks.

These are prepared for explosive growth that will transform the financial landscape as?consumers demand?increased control over data and the government releases policies supporting this process.

All this will revolutionise the industry and economy in 2024 and beyond.

Thus,?the future lies with consumers. The ability of consumers to pick and choose what they require with ease and at a low cost will determine the success of the industry. Service providers can contribute to this by focusing on user experiences and facilitating a secure and connected ecosystem.

Abbreviation

Open Banking: This refers to the practice of providing third-party financial services providers with open access to consumer banking, transactions, and other data from banks and?non-bank?financial institutions through the use of an application programming interface (API).

Open Finance: This is an?evolved,?new concept of open banking that is?emerging in some countries where authorities have decided to?extend?the scope of this model to other financial information beyond banking, including fiscal authorities, insurance, pension funds, or?even?utility providers, leading to the building of new products.

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