Open banking is redefining the way financial services customers can regain control over their personal banking data - and there’s no going back. The fight for control over data ownership has become so universal that it spans almost all industries. Whether it’s social media data or bank account information, consumers are no longer okay with one company having sole access or control over their personal information.
Industries that aren’t greeting the rise of open banking with open arms include those that are challenged by restructuring their old ways and adopting new technologies. For some industries open banking may simply be a pain in the neck, while for others it’s the end of an era. With any such far-reaching changes there are bound to be a lot of industries disrupted by open banking, so who stands to feel the greatest impact?
Who's being disrupted?
It’s been a quarter of a century since Clayton M. Christensen and colleagues introduced their theory of disruptive innovation. Today it’s too often become a misunderstood and overused mantra for any sort of business that shakes up the market through technology. Not all new technology can necessarily be labeled as disruptive.
When talking about open banking as a disruptive innovation, we mean the “process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses,” (Harvard Business Review, 2015). Open banking isn’t changing the way everyone controls their financial data overnight, but we can see big, long-term changes happening in several industries. Christensen theorised that by the time big incumbents realise the value of a disruptive innovation, it’s too late for them to react and keep up with the disruptor.
Big retail banks
Open banking allows alternative financial service providers to create competing solutions for banking clients, which facilitates and increases competition in the banking space. The total control retail banks once had over client information is officially becoming a thing of the past.
By giving clients access to their own banking data in real-time to make transactions, invest and save in the most convenient way, open banking provides opportunities for third party apps to provide services previously only offered through a retail bank. To stay competitive banks would need to transform legacy systems and embrace the importance of digital channels.
Plus there’s the cost of creating the APIs. In Europe, all retail banks are required to comply with PSD2 and create open APIs that allow certified third-party providers to securely access their client’s banking data with the client’s permission. The median amount banks spend on open banking-related projects to become compliant is between €50 million and €100 million. But according to the European Commission, it’s worth it to create a “payments environment which nurtures competition, innovation and security to the benefits of all stakeholders and consumers in particular.”
Traditional credit bureaus
The credit bureau model thrives on financial information that is locked up in silos. The reign of credit bureaus, which dates back to the 19th century, began as a way to increase trust and transparency in the financial system. Today, their influence reaches beyond just finance. Now credit bureaus are also involved in the process of establishing trust between parties -sometimes at the expense of privacy.
Open banking allows for the free movement of financial data, which by extension reduces the information silos. The expansion of open banking will inevitably reduce the grip that traditional credit bureaus have on the banks and lenders. Additionally, Covid-19 has highlighted some of the deficiencies credit bureaus suffer from, signalling the end of an empire.
Who are the disruptors?
Open banking may not be a gamechanger for every industry, but there are definitely some stand-out opportunities in several verticals. Any industry that provides access to more personalized products and services, frictionless payments, and more convenient sharing economy services is well on its way to becoming a disruptor when it comes to open banking opportunities.
1. “Buy Now, Pay Later” e-commerce
The “Buy now, pay later” (BNPL) business model is based on boosting purchase conversion rates by reducing the number of steps clients need to take to get the product they want. Open banking helps BNPL companies keep the conversion rates high by providing access to income and credit risk information for potential clients in less time and without needing to contact traditional credit bureaus. BNPL has already proven to be a grand challenger to traditional credit cards and consumer loans.
2. Digital mortgage lending
Open banking reduces the number of steps and documents needed to apply for a mortgage. It can be a substitute for the bank statement banks require to submit a loan application, as well as automate loan applications. For credit specialists, this saves time spent on data validation and allows them to focus on asking the right questions during the mortgage application process. This creates a better customer experience, which is critical in making one of the most important decisions in a consumer’s life.
3. Consumer lending
Consumer lending is increasingly going digital, and open banking allows consumer lenders and credit card companies to increase conversion rates and approval rates for creditworthy customers. Open banking not only increases the speed of loan application screening and approval, but also reduces admin costs for servicing each loan application.
4. Loan brokers
Similar to consumer lending, loan brokers also need to be able to understand customer needs and match them with appropriate loan providers. Besides reducing servicing time and costs for individual applications, open banking enables brokers to learn more about each loan seeker and automate matching between lenders and loan applicants.
5. Online gaming
Smooth experiences are critical for online gaming and betting sites. Open banking enables them to verify the source of funds in a quick and seamless manner. It also helps identify high-risk customers and become more compliant with responsible gambling rules.
Rent payment delays put unnecessary financial stress on landlords and housing companies. Open banking provides global access to information about a tenant's current financial wellbeing and ability to make rent payments, including when tenants are foreign nationals. It also allows tenants to prove creditworthiness to landlords by sharing their income information with landlords directly and securely.
7. Debt collection
Debt collection is about understanding the true financial health of a customer and helping them settle their debts. Open banking adds a layer of cash flow information previously not available to debt collection agencies, enabling them to more efficiently collect and refinance debt.
Customers are increasingly choosing to pay for insurance in monthly installments. Open banking can be used to evaluate customer creditworthiness before providing the insurance product, and to reduce credit risk associated with financing larger insurance products.
Open banking enables a frictionless customer experience when authorizing payments in mobile wallets, gaming sites, investment platforms and other transactional applications. It enables various platforms to allow their customers to authorize payments to and from their personal bank accounts without the need to send their bank statements.
What’s coming next?
While we’ve taken a look at the industries where open banking disruptors are currently changing the course of “business as usual” - the effects of financial services innovation won’t stop there. Helped along by progressive legislation, new fintech startups are constantly increasing the use cases for open banking. Just like with online shopping, once consumers get used to the convenience of going digital it’ll be hard to convince them to come back to using legacy technologies. Verticals like personal finance are patiently waiting for the next “Amazon” to come in and completely change the industry, so watch this space!