2021 will be characterised by volatility and uncertainty as financial institutions navigate the economic and social impacts of COVID-19. The pandemic has delivered a systemic shock unlike anything seen in the modern era. It seems inevitable this will reverberate across banking institutions and financial systems.
Open Banking is attracting attention in the financial world – because it has the potential to enable communities and individuals to make informed financial choices as they recover from the pandemic’s impacts. There are signs that the coming year will see open banking become a strategic enabler for financial institutions and the communities and individuals they serve. This drive will likely spur demands for the connecting interfaces/APIs (which power open banking). These will then support the building of ecosystems that will include a diverse range of stakeholders – from traditional banking to fintech and third-party innovators. We expect to see four trends emerging, or consolidating, in 2021.
Trend 1: financial institutions shift to open banking becoming a key driver of business strategy
With early adopters of open banking beginning to reap commercial benefits, other institutions will realise there is more to open banking than just compliance. This will represent a significant change and must involve business strategy adaptation.
Open banking can – and should be – a journey towards digital transformation, especially for those banks seeking to improve the consumer experience. In a challenging business environment, open banking will, therefore:
- refocus on solving consumer problems and integrating these solutions into the fintech ecosystem
- help create higher-value offerings (through, for example, partnerships)
- cut costs
Trend 2: there will be further movement towards a common core for standards globally
Open banking standards are evolving from their common denominator – the open banking standard in the UK. Already there is substantial commonality across jurisdictions.
This represents an opportunity for fintech firms to develop cross-border services that serve a highly mobile client base that does not wish to be constrained by geographical restrictions. Regulators are already considering cross-border interoperability. For example, they are looking at the future evolution of open banking with the second Farrell Review on the Consumer Data Right in Australia and with New Zealand’s proposed Consumer Data Right.
Similar moves seem inevitable in mature open banking markets like those in the UK and the EU. Both these markets need to enable international trade and business as well as improve the consumer experience.
Trend 3: COVID-19 will drive the desired need for the greater financial literacy and flexibility provided by open banking
COVID-19 has heightened the customer need for an ecosystem which goes beyond single banking institutions. Consumers want both access and to be able to evaluate alternatives across the whole spectrum of products and services.
In effect, the millions of people affected economically by COVID-19 will want information and flexibility to help make better financial decisions on loans, investment and savings products. They need better outcomes as they try to recover which means there must be greater visibility provided about the options available (to help people get back on their feet).
Whether this is via sub-prime lending, alternative lending, switching to a better product or investing differently, it must suit each customer’s current position and desired future state. Open banking enables third parties to create applications that offer users a superior understanding of their financial position and what actions are available. This diversity cannot be delivered by a single bank. Rather it will be part of a broader drive towards data-driven decision-making provided to consumers across markets. In effect, this represents a move from “open banking” to “open finance” to “open life”.
Trend 4: US financial regulators will catch up
The complexity of the existing US financial regulatory framework means there has been the same regulator-driven leadership to establish open banking standards as seen in markets like the UK. Yet initiatives like the FDX API standard – developed by a diverse group of industry players – have:
- attracted some 12 million users already.
- filled the gap (in terms of providing a common language for secure, permissioned data sharing).
Regulation, however, is starting to catch up. The Consumer Financial Protection Bureau (CFPB) announced in October an advance notice of proposed rulemaking. This is likely the first step to creating formal open banking regulation in the US. As in other markets, we expect the U.S. government to codify and build on those industry-defined standards already working today.
Connecting the open banking ecosystem
Underpinning all these trends is a demand for connections between ecosystem players, whether banks, fintech firms, or other third parties. The way to accomplish this is for banks to build effective interfaces. Today, those interfaces are APIs. The important factor now is that these APIs be exceptional. If they are not, fintech firms will not consume them consistently or broadly enough to deliver positive business results.
The challenge is, therefore, to:
- create relevant and usable APIs
- then ensure these are reliable, discoverable, usable, high-performing and flexible
- offer long-term value to both API consumers and their end-consumers.
This means banks will need the right technology, the right partners, and the right kind of commitment if they are to implement a robust digital strategy which exploits 2021 open banking trends in order to participate in a business-supplementing ecosystem that reflects the changes caused by COVID-19.
Founded in 2005, WSO2 is one of the world’s best open source integration vendors, helping digitally driven organisations become integration agile. WSO2 is a global organisation with offices in Europe, the Americas, Sri Lanka and Australia.
WSO2 solutions give enterprises the flexibility to deploy applications and services on-premises, on private or public clouds, or in hybrid environments and easily migrate between them as needed. All of the products are pre-integrated allowing enterprises to focus on value-added services and get to market faster.