Open banking is here to stay. What you need to know.

The concept of open banking as we know it today began to emerge in the early 2000s with the rise of the internet and online banking, but it wasn’t until 2015 that the first open banking regulations were introduced by the European Union.

Originally, open banking aimed to stimulate competition and innovation in the financial and payments markets. By empowering consumers with greater access and control over their financial information, it sought to shift the balance of power towards individuals.

However, open banking is also revolutionizing the financial landscape by allowing banks and non-bank providers to securely access customer financial data, with explicit customer consent. This empowers banks to streamline processes like loan approvals, automatically verifying income and expenses for faster and more efficient services. Additionally, non-bank providers can leverage this data to develop innovative financial products and solutions tailored to individual needs such as budgeting tools, investment advice and insurance solutions.

Open banking has two main types of third-party providers (TPPs): Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs). AISPs access a customer's financial information from multiple banks, offering consolidated financial overviews. This is useful for budgeting apps, financial management tools and credit scoring services.

Payment Initiation Service Providers (PISPs) initiate payments directly from a customer's bank account without requiring card details. This is useful for online shopping, bill payments and money transfers. Both AISPs and PISPs must be registered and authorized by regulatory authorities to ensure they meet security and operational standards, safeguarding consumer data and maintaining trust in the Open Banking ecosystem.

In the background APIs (Application Programing Interfaces) connect various services, streamlining processes. For example, a loan provider's API can quickly process loan applications by directly accessing a customer's banking information through open banking. This eliminates the need for manual data entry, speeding up the application process.

PSD2: Protecting consumers’ financial data in Europe

To protect consumer data in open banking, strong security measures and clear guidelines are essential. This involves setting boundaries to safeguard sensitive information and empowering consumers to make informed decisions about their data usage.

The best example of this is the PSD2 (Payment Services Directive 2) which was introduced in 2015 in Europe. While many countries were still exploring open banking, the European Union took a proactive approach by introducing PSD2. This clear regulatory framework accelerated the development and adoption of open banking standards and services within the region.

Thanks to PSD2, Europe is the global pioneer of open banking, with the highest adoption rate. The number of open banking users in Europe continues to grow rapidly, projected to reach 64 million in 2024. European open banking has primarily focused on traditional financial institutions and fintech companies.

The UK, in particular, has emerged as a global leader in open banking, thanks to the proactive efforts of its regulatory bodies which mandated the use of specific APIs for major UK banks, ensuring consistency and interoperability across the ecosystem. In contrast, many other countries have taken a more fragmented approach, with different institutions developing their own proprietary APIs, which can hinder seamless integration and innovation.

Having a standardized API specification has ensured interoperability between banks and third-party providers and has resulted in the UK maintaining a substantial lead in open banking adoption, outpacing countries like Italy, France, Spain and Germany by nearly five times.

PSD2 will be replaced by PSD3 which is due to come into force in 2026.  

A global shift: Open banking beyond Europe

While Europe, particularly the UK, leads the global charge in open banking, a more fragmented and decentralized approach has slowed progress in some regions. Nonetheless, other countries are making significant strides, as the following examples illustrate:

• United States: The US has historically lagged behind Europe in open banking adoption. While not federally mandated, market forces and voluntary initiatives by fintech companies and banks are driving its growth. The Consumer Financial Protection Bureau’s (CFPB) focus on consumer data rights could further shape the future of open banking in the US.
• Canada: Canada is in the early stages of implementing open banking. The Canadian government is working on a framework to ensure its safety and benefits for consumers.
• Australia: Australia introduced the Consumer Data Right (CDR) in 2017, extending beyond banking to sectors like energy and telecommunications. The CDR aims to give consumers control over their data and promote competition. Open banking under the CDR started in July 2020 and is gradually expanding.
• Japan: The Japanese government amended the Banking Act in 2017 to promote data sharing between banks and fintech companies. Several banks have since launched open banking APIs.
• Brazil: Brazil launched its open banking initiative, 'Open Finance', in 2021. The Central Bank of Brazil is leading this initiative which is being implemented in phases, starting with data sharing and moving towards more complex services.
• Mexico: Mexico's Fintech Law of 2018 sets the framework for data sharing between FIs and fintech companies. The CNBV oversees the implementation to ensure secure and beneficial data sharing.
• United Arab Emirates (UAE): The UAE is exploring open banking as part of its fintech strategy. The Central Bank of the UAE is working on regulations to facilitate data sharing and promote innovation. Several banks in the UAE have started adopting open banking practices.
• South Africa: South Africa is in the early stages of open banking adoption. The South African Reserve Bank (SARB) is exploring its potential benefits and risks. While there are no specific regulations yet, some banks and fintechs are experimenting with data sharing.

Banks are facing new challenges and opportunities

Overall, open banking is driving innovation and competition in the global financial industry but it’s not without its challenges. Banks have traditionally guarded customer data closely, but open banking requires them to share it with third-party providers. While banks bear the costs of maintaining and securing this data, they can't directly monetize it due to regulatory restrictions. This creates a challenging dynamic where banks must balance the benefits of open banking with the potential loss of control over their valuable asset. However, they can also leverage this data to create innovative products and streamline services.

By accessing customer financial data through open banking, banks can streamline their processes and offer faster, more efficient services and products like instant loans and quicker mortgage approvals. Additionally, non-bank providers can leverage this data to develop innovative financial products that may not even have been thought of yet.

Looking to the future

The future pace of open banking adoption will hinge on the effectiveness of regulatory frameworks. Global standardization of APIs and practices will be crucial to ensure seamless integration and data security. While the full potential of open banking may take time to realize, the next five years promise significant advancements in its global adoption.