Open banking is a set of standards that aim to centralize and automate many and varied financial tasks. It is a new financial ecosystem aimed at giving individuals and SMBs more financial options with centralized management, as well as facilitating information sharing between financial systems.
Open banking aims to define a set of standards and APIs which are programming interfaces that allow disparate systems to share information between each other. We use APIs in our everyday life, for example: When we allow apps to debit money from our bank account in order to send money to a friend, or when we view credit reports on-line directly from a credit card company’s Web site. Both use APIs to interact with the banks’ and credit agencies’ computer systems.
Open banking aims to take financial APIs to the next level. By allowing a set of open standards to be implemented, financial technology (fintech) startups will have greater access and a more level playing field. Many entrepreneurial minds will create new ways to conduct financial transaction, increase efficiencies and provide access to lending to many who are now out of reach of such services.
With open banking, individuals and SMBs will use a single platform for all their financial transactions. The platform will provide access to all financial systems including savings & loans, credit cards, payment processing, credit unions, investment portfolios and pension funds. Imagine logging in and seeing balances from several banks, credit cards and other financial institutions in a single site. Moving money between accounts will be seamless and easy, and done from a single platform. Gone will be the days when moving debts or cash from one entity to another requires hefty fees and complicated forms.
Technology has disrupted many industries in the past 30 years. The days of quaint record stores, travel agencies and newspaper routes are gone. Many large businesses have also been disrupted, seemingly overnight. Long distance phone charges, the biggest cash cow of incumbent telecoms, has vanished and ride sharing has replaced taxi cabs. Will banking be the next big business model disrupted by technology?
Highly profitable services such as wire transfers and mortgage loans have already experienced profit margin decline as a result of cash transfer apps and on-line mortgage aggregators. Open banking will add additional pressure on banks as they will be competing to sell products and services in a marketplace ecosystem.
With so many regulations in place, it’s unlikely to happen quickly, however banks will need to adjust in order to thrive in a tech savvy environment.
Startups will gain a larger foothold in the financial services business which means that traditional cash generating services will come under increased pricing pressure.
Consumers will likely be the biggest benefactors of this increased competition. Prices for traditional services will fall as middlemen will be replaced by automation as a means of cost savings. Consumers will be able to automate processes such as electronic payments from multiple accounts via a single Web interface.
Loan applications, even for expensive durable goods, will be an instant process as consumer’s credit-worthiness will be instantly available as a result of data gathered from interconnected financial sources. Consumers will even be able to use multiple sources of financing, such as credit cards and lines of credit, to purchase goods whose value exceed any one credit limit, all through a single transaction.
Banks with a culture of agility that embrace change could see an uptick in both revenue and new opportunities, since open banking will create more financial transaction as a result of the ease in which financial transactions will be enacted.