Open banking is on the rise in Europe. A quick Google Trends search shows how quickly interest in the term has grown over the past five years. But we are just witnessing the beginning of what will revolutionize financial services. Exactly who will benefit most from open banking is widely speculated. My money is in tech giants — here’s why.

When I founded Salt Edge in 2013, the company’s two products, an aggregation platform and a personal financial management tool, aggregated customer data by screen scraping. Open banking didn’t exist yet. It will be another five years before the revised Payment Services Directive (PSD2) comes into force. Until then, Salt Edge had no access to the bank’s API. Nor was there any idea of ​​how much open banking would change business models over the next decade, much less how it would change the financial side of things.

Impact of PSD2 on financial services

By requiring financial institutions to share data with third-party providers (TTPs), PSD2 aims to foster competition and innovation in a financial services sector traditionally dominated by retail banks. Initially, TTP appeared to benefit the most from the new regulations, as banks were barred from monetizing APIs and had given up exclusive control over valuable consumer data. A kind of TTP appeared. Account information and payment initiation service providers (AISP and PISP), which has exploded the number of use cases for open banking-driven financial solutions.

The most innovative development is currently unfolding in payments initiation. This allows customers to initiate payments directly from their bank accounts by third parties via money transfer schemes such as Faster Payments, SEPA and Elixir Express. Eliminating middlemen is a win-win for both customers and sellers. The latter pays dramatically lower fees, but the former is more secure against fraud since you don’t have to provide your card details (and saves you from having to type them in). Given that bank transfers today take him 10 seconds instead of his previous 10, card payments no longer have a speed advantage and the future is in question.

Cards are 60’s and 70’s technology. No need to carry a piece of plastic around when you can authorize payments using your phone.

Meanwhile, account information services continue to find new use cases. In the early days of Salt Edge, AISP primarily targeted consumers. Consumers benefited from better understanding and control over their spending, borrowing and saving habits. Many of Salt Edge’s first clients wanted to be able to access all their financial data in one app, with data like account balances and transaction history. Today, AISPs have diversified their customer base to include groups such as private companies that have a real-time view of their financial situation and lenders that can perform transparent credit evaluations using personal financial data requested by consumers. increase.

Why Open Banking Isn’t Always Bad News for Retail Banks

Now that the industry has had time to adapt to PSD2, the benefits of open banking for retail banks have also become clearer. Banks can combine the newly uncovered set of customer data with the power of machine learning (ML) using far more resources than TTP. By mapping a single customer’s data across an anonymized customer base, retail banks can make highly accurate forecasts, especially when supplementary data such as inflation and market changes are included in the calculations. I can do it. A good example is salaries. If a retail bank can predict a customer’s future income, this information can be used to suggest retirement and investment plans. The applications of ML are limitless, but good data management will determine the level of bank success.

Retail banks are only scratching the surface when it comes to finding open banking use cases. However, it is unclear if they will be long-term winners.

How Tech Giants Can Enter

Another stakeholder has more influence than banks. A giant of technology. Value He has yet to successfully compete for a key piece of the chain, but the tech giant is already making inroads into retail his banking. Apple recently acquired Credit Kudos, a credit scoring startup. This could eliminate the need for a credit card with Apple Pay and allow you to offer the ability to buy now, pay later. It won’t be long before you can ask Siri for your bank balance or send money to a friend.

Open banking will give financial institutions a better picture of people. Because social media allows us to manipulate images and choose what information we share, it’s hard to predict who people really are. Open banking gives banks access to data that represents the real, unedited lives of consumers. This is valuable data. When you combine this with the power of companies like Google, the potential is tremendous.

In my opinion, the player who controls the user interface will benefit the most from open banking. These players are more likely tech giants than banks. Bill Gates once said that we need banks, but we don’t need banks. As I see it, the rise of open banking marks the beginning of this transition. I think our money will always be in the bank, or at least for a long time, but consumers will interact with and manage their funds through apps belonging to the tech giants. The combination of digital expertise and focus on customer experience, coupled with sheer scale, makes the tech giants in a formidable competition.

Financial applications led by tech giants mean better deals for consumers.Consumers now tend to rely on a single provider for the majority of their financial needs, so they say, “I have a bank. [insert bank name]”. It would be much more efficient for the consumer to pick the most attractive product from various banks, but vendor lock-in often prevents this. In the future, open banking, where technology giants like Google will select the best checking account, savings account, retirement or investment plan from different banks and offer them in a single solution. You could have a led financial app. In this scenario, banks are likely to compete with each other to partner with tech giants and may become more specialized in specific solutions.

short-term open banking

In the nearer term, the biggest change we will see in open banking is the evolution to open finance that will likely form part of PSD3. Open finance requires different types of entities (not just retail banks) to publish their data. This will give TTP access to investment services, insurance companies, gig economy platforms and pension providers. From a business perspective, handling an account such as a mortgage is logistically similar to handling a bank account, requiring very little change in the underlying technology while providing significant benefits to the consumer. .

How banks and TTPs stay competitive

Challenges still need to be overcome before retail banks and TTPs can truly take advantage of open banking developments. At the time of payment initiation, there have been multiple situations where the bank has authorized the payment but the merchant has not received the funds or the funds have been cleared to a merchant’s account that has not been authorized by the customer. Solutions in such situations can be difficult. TTP has limited access to information and can only rely on payment status responses from the bank’s API. The rest are black boxes.

Fortunately, these problems are not insurmountable. Payment issues are often caused by issues in your bank’s API or core banking and payment processing system. To identify the cause of specific problems and minimize bugs in the payment process, TTP and banks thoroughly test their applications using real financial accounts, payment instruments, and device/OS combinations. need to do it. By exploding the number of institutions, service providers and accounts that can be combined, open banking has simultaneously proliferated the number of scenarios that banks and TTPs need to test.

The stakes are high. In the era of open banking, the future of finance is in the hands of companies that provide the best digital experiences for consumers.