And what role do they play?
Traditional banking has often been shrouded in secrecy with its inner workings, transaction processing procedures, financial operations and other activities being well-hidden from the uninitiated public’s view. And though billions of people rely on banking services on a daily basis, over two billion remain unbanked.
The discrepancy between the accessibility of the traditional banking system and the availability of convenient instruments for streamlining such accessibility is what has given rise to an entirely new industry that is thriving in the post-pandemic world. Open banking is a relatively new term that has come to encompass a broad range of sectors, whose players are offering third-parties the ability to build services and applications that provide API connections to financial institutions.
The open banking sector is already enormous and was valued at $11,287.88 million in 2020. The sector is expected to reach $520,42.13 million by 2027 with the CAGR of 24.40% over the forecast period. Such dynamics are being driven by a two-pronged situation on the broader global financial and banking markets. The first issue is the fact that a growing number of third-party developers have started marketing their services, attracting droves of users with their convenience and use cases. The second is because the banks themselves are starting to get engaged in the development of their own open banking applications to remain competitive on the market and occupy a share.
The common issues most associated with the traditional banking industry have stayed the same over the years, summing up to the same factors that impede its accessibility to broader strata of users.
The excessive bureaucracy, coupled with the need for rigorous background checks and compliance with oftentimes strict regulations are slowing the entire process of client onboarding. The high entry thresholds for using some financial services in the B2B sector are also detracting companies from some banks, making them opt for more convenient solutions.
Transaction processing times and the associated fees are also a major impediment, as connections to major gateways like PayPal may either be restricted by sanctions regimes or local regulations. In other cases, the transfers take days, which is a serious hurdle for many businesses. The commissions involved are biting at times, pushing banking further away from clients in terms of affordability.
Lastly, but no less important, is the issue of accessibility. Most financial institutions do provide APIs, but they are lacking or inconvenient. The support service is also often lacking, thus adding another point in favor of alternative solutions.
Open banking solves most of the problems that are impeding traditional banking from reaching more clients. First and foremost, the connection of such services to merchant and other company resources is fast, a factor spurred by high competition on the open banking market, which forces providers to cater to their clients and simplify onboarding procedures to the maximum while ensuring high degrees of client support.
A report by Deloitte highlights the given factor by stating that the future lies with such banking products, services and functions that are made open to third-parties and can be monetized on the basis of high market competition, which results in quality offerings.
Combined, the benefits of open banking are made clear by their ease of use through simple APIs and the availability of alternative means of payment, such as cryptocurrencies. The use of digital assets not only drastically reduces fees and transaction processing times, but also opens an entirely new audience of adherents of cryptocurrency payments to companies resorting to open banking services.
A report by the World Economic Forum recently revealed that in 2020, over half of the respondents involved had resorted to open banking initiatives. Another 29% of respondents stated that such services are part of their chosen innovation strategy. 45% of executives surveyed had stated that they want their banks to become “digital ecosystems”, given that open banking is critical to their businesses. The report on the IEU reveals that 87% of countries have some form of open banking APIs in operation.
In its latest annual report, the OBIE noted that more than 3 million users of the UK’s open banking system, including more than 700 companies are either already involved in it or are considering it. The European Union focuses on regulation in the form of PSD2, which dictates that banks must create the APIs to interact with third parties, leading to high levels of adoption.
As for the Asia Pacific region, the market for open banking there is at an earlier stage of development, being driven by market forces. Many Asian countries like Singapore and Hong Kong are currently in the process of placing a high priority on the development of open banking, considering local willingness by individuals to share their data.
The US is leading the way in open banking, where many banks openly collaborate with fintech startups like Plaid, PayPal, Intuit and Zelle. The eased approach to the sector on the part of the regulators is playing in favor of the market.
Another report by Deloitte states that banks have been vociferous about the lack of reciprocity between banks and third-parties, especially on the part of BigTechs companies.
The regulatory challenges regarding the banking sector are being seen as the unfair factor that is impeding them from providing a broader range of solutions that could tap into the digital assets market. As for third-party services, they are also encountering opposition on the same front, which is limiting their scope and ability to operate with cryptocurrencies in a larger number of jurisdictions.
The combination of regulatory challenges on the path to greater adoption are being bolstered by general apprehension on the part of the broader audience at large regarding innovative financial services. The adherence to traditional financial services and their limitations can and should be dissipated by greater dissemination of information about the potential of digital currencies and their application in conjunction with traditional banking.
The transformation of the global economy into a crypto-friendly environment can be achieved through the adoption of a more wholesome approach that would include users and their end benefits.
The creation of ecosystem-backed cryptos would allow open banking services to tap into existing systems that rely on digital assets for a broad range of use cases. The need for such innovative services would usher users into relying on open banking solutions and promote adoption.
Cryptocurrencies exist on the market, but they need to make an impact in everyday lives to be of any use outside the trading on volatility spectrum. The availability of favorable regulation and a larger number of merchants accepting digital assets as means of payment would allow such a step in transformation to take place. In addition, the release of state-backed digital assets would have a favorable impact on the given aspect.
Having leverage is just as important, since businesses integrating digital currencies into their systems are instantly gaining value. This type of value is expressed in their versatility and openness towards a crypto-loyal audience.
Ultimately, crypto services should merge with open banking and provide a unified service that would be suitable for users looking to use both financial and alternative, decentralized financial instruments for any number of reasons. Many merchant service gateways are already creating unified solutions and major payment providers like PayPal have made the transition from being fiat-only services to crypto-inclusive platforms for merchants and private users.
The end user is the main target of all commercial activities and catering to the needs and convenience of users is the primary goal of all financial services. The rule of natural selection applies to the financial market as well, where competition is stiff and services that do not cater to their users ultimately fail.
The same applies to open banking, which should strive to simplify onboarding and provide easier application interfaces that do not frighten away users who are not experienced with the digital assets market. One of the ways is concealing and automating many of the processes involved, like wallet creation, transaction confirmation and others.
Engaging users is just as vital. One of the ways to retain customers is to provide multi-banking solutions, which are already being used in banking and finance management. Such services allow users to manage numerous accounts and providers via a unified interface. Once again, convenience is the key, considering the abundance of services that modern users resort to.
Open banking is a major, untapped market that can evolve and develop from mere API connections into an alternative banking industry capable of competing with the mainstays of the financial market. By exploring new sales opportunities through connections with decentralized ecosystems and existing merchant channels or payment gateways, the entire sector could merge into a single interconnected platform run and paid for using cryptocurrencies.
Though some major hurdles still stand in the way of adoption, the foundation is set for the continued development of open banking in the years to come.