When we talk about open banking, it’s usually opportunity and potential that is first to be mentioned. Regardless of their prominence and hypothetical impact somewhere in the future, what everyone really cared about is what open banking is able to do today. What are the tangible open banking benefits that everyone can appreciate?
Well, there are lots of them, it seems. In order to be precise, we have to put them into three different categories. These categories help not only distinguish the benefits of open banking but also help different participants in the open banking field, get an understanding of how its implementation should carry positive momentum for everyone.
The open banking concept was devised with the customer-first mindset. It’s the creation of elected representatives who have jobs due to the fact that the customers trust them. Back in the mid-2000s, the trust in the banking sector was quite low. It reached unseen depths during the financial crisis of 2008, but by then, the European Union had already set out to change the way the digital finance infrastructure is and how the world of digital finance works. The first payment services directive was released in 2007, focusing on the regulation of digital payments.
In 2018, PSD2, the second and revised version of the directive came into power. The new directive outlined the way that digital monetary transactions are to be conducted from now on. In addition, there is also a huge emphasis on personal data security and what the data can be used for. The keys to open banking are the consent of the user and SCA or Strong Customer Authentication. Consent is a vital part that enables service providers to utilize open banking. Without consent, they aren’t able to initiate any kind of service or data processing. This means that the customer gains the tools to access financial services whenever they need and have more freedom to find services, tailored to their specific needs. Strong customer authentication is actually just a version of 2FA or MFA, focused on digital banking and digital finances in the countries that have adopted PSD2.
From the perspective of a customer, open banking benefits are both short and long-term. There are plenty of them too.
To begin listing benefits, let’s first move back to the two crucial elements of open banking for the customer – Strong Customer Authentication and consent. In terms of SCA, customers can be very reassured that their data is secure and their financials become super difficult to tamper with. In order for someone to take advantage of your financials, they would need to not only know your PIN codes and/or login passwords, but to also get your phone (or another device), or obtain biological duplicates of your inherited identification (fingerprints, voice, face ID) – which is almost impossible to do. Such security is a huge step up in order to protect personal data security and prevent data theft.
Moreover, consent by the customer means that banks aren’t free to use clients as guinea pigs or to just make services that are solely oriented to their benefit alone. With the current market conditions and open banking in effect, customers can quickly scout the market and find the best deals. There is more access to a wider spectrum of financial services, forcing both big and small players to step up.
So, for a short sum up we can say that open banking benefits for customers will be felt through additional data security, more access to better financial services, and more transparency in money management digitally. More innovation from developers should also lead to better and more relevant products.
Even though it was developed as a customer-first concept, it’s widespread knowledge that if it’s good for the consumer, it’s usually good for the economy. By implementing the second payment services directive (PSD2), the EU and the EEA set out to evolve the banking sector and make it more suited for the modern digital age. Through the regulation-inspired evolution of digital finance, both local and regional economies should benefit. Open banking benefits for the economy are visible in the long-term added values that they bring. However, in terms of short-term impact, open banking can and already has caused disruption by forcing many companies, users, and developers to adapt, making them re-think their business approach, use habits, or concepts respectively.
Moving back to the benefits for the economy, it must be noted that open banking encourages competition and is, at least on paper, aimed to remove discrimination by the size of the financial companies. This means that the market is pushed towards the state of ideal competition, having a balance of giants and emerging or smaller companies, all coexisting with synergy.
Everyone has the same requirements to meet and no company gets exclusive treatment, regardless of its age, market cap, or client list. This is one of the more notable open banking benefits for the economy.
Moving over to areas that are a bit more particular, we can note more added value for the economy as well as innovation in the fintech sector. The basic economics shows us that service-based economies are the most prosperous. By innovating in the IT and digital sectors, local or regional economies can establish high-paying, high-skilled jobs that attract top talent. Furthermore, since financial services are essential to almost everyone in the world, having a thriving fintech sector is advantageous to everyone.
Finally, with sufficient developments and progress in the fintech sector, economies can expect to create sustainable foundations for the future. These developers can create businesses that will grow and become significant employers in the future. By enabling the continuity of firms and entire sectors, governments (legislators) can improve the economic state of their country or region for the long-term future.
Open banking benefits for businesses (banks & developers) are hard to notice on the surface, but if you are able to look at the long-term perspective, there is actually a lot to be gained. For instance, every financing company that adopts open banking legislation will have its reputation improved due to the fact of adopting a customer-first concept.
For businesses who want to increase their market share or to make their own way in a very competitive environment of fintech and banking, the only viable way is to innovate. Open banking allows a lot of freedom for innovation, encouraging various businesses to push for more technological gains as well as maximizing various resources within the parameters, described in PSD2.
Big banks will get the push to seek innovation and grow their lead and gap from the competitors. By working together with developers, they can implement cutting-edge features and gain trust from more customers whilst also contributing to society and showing responsibility with regard to its clientele. Smaller finance companies can also work with developers or find their own resources to develop cutting-edge tech and promote services that might outclass what the big banks are able to offer. This should allow them a place under the sun, attracting new clients from companies that are less eager to innovate.
In addition to the leveled playing field, it should also be acknowledged that businesses in finance now have the legislative database to find areas and niches for more profitable opportunities. With the digital environment continuously evolving, businessowners, as well as R&D teams, can utilize that knowledge to find advantageous opportunities for new developments.
Yes, of course. Open banking is a very modern and very carefully planned concept; however, it does have risks and threats that could hamper the evolution of the digital finance sector.
The most obvious risk is that the regulations, currently in force (PSD2) will quickly go out of relevance. With such rapid advancements in IT, once the technical aspect of the directive becomes outdated, the whole finance sector becomes very vulnerable due to the fact that the adoption of PSD2 had to be universal. Regardless, it’s highly unlikely that tech will make such immense advancements that 2FA (SCA) and current APIs will become outdated and vulnerable to hackers or cybercriminals.
Furthermore, there are apparent concerns about the market’s growing dependability on the tech sector. It means that the power balance could eventually shift from the banks to the tech companies. Some skeptics believe that by developing the best solutions with the most benefit for customers, developers could be able to make banks very dependent on their services but this scenario seems very unlikely.
Finally, a worthwhile thing to note is that most threats and risks are associated with the fact that someone could manipulate and abuse the current regulations. However, as of right now, the self-sufficiency of PSD2-regulated open banking services ensures that yours, ours and everyone else’s data is and should be safe!
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