The words "open" and "banking" have developed a specific association in recent years. And it’s perhaps too early to drop the open in open banking as something inherent. But, in the same way that digital is largely unnecessary in digital banking now, it won’t be long.
Still, outside—or often as a result—of open banking, the banking sector is opening up. Below are some of the ways we’re seeing it evolve.
Whether deliberately or coincidentally pushing government agendas, the financial incentives to banks and financial technology companies (fintechs) around financial inclusion are bigger than ever. The global gig economy is projected to be worth $455 billion by 2023, according to a study from Mastercard and Kaiser Associates. Unbanked and underbanked populations around the world represent an important proposition. That’s particularly so in an increasingly congested market.
For example, the provision of credit through alternative scoring methods or early real-time access to a portion of a paycheck are as relevant for nearly cashless Sweden as for cash-reducing Egypt in their open-banking agendas. And the support of electronic IDs as open banking broadens into open finance is as important for Australia’s myGovID as it is for India’s Aadhaar biometric ID system.
Another trend is stablecoins, or cryptocurrencies backed by cash or other approved financial instruments. These are making digital currencies viable options for consumers and businesses. By spreading synchronized copies of financial ledgers across multiple parties, distributed ledger technology is evolving to make privately issued stablecoins a secure and easily transferrable digital asset.
Central banks are also developing their own digital currencies. Central bank digital currencies (CBDCs) are issued by central banks and are designed to function as a new form of “cash” that could even be programmable. The Bahamas recently became the first country to allow individuals to bank directly with its central bank using digital Sand dollars pegged to Bahamian dollars. The aim is to improve efficiency in the delivery of financial services across the islands. A prepaid card already allows people to instantly convert Sand dollars into Bahamian dollars to make purchases. And as CBDCs emerge across the globe, open banking won’t be far away as commercial banks and fintechs become the interfaces between central banks and their newfound customers.
Agile business models and customer responsiveness used to be touted as a way for fintechs to compete with traditional banks' industry expertise and brand recognition. Competition then gave way to collaboration as newcomers and incumbents realized the strength in partnerships. But with digital banking a given, banks can no longer rely on their fintech counterparts to offset deficiencies in legacy in-house infrastructure.
The financial efficiencies of the cloud don’t just come from external data storage negating the need to maintain outdated servers and hardware or worry about data backup. Mobile banking apps functioning in an open banking ecosystem are also demanding faster delivery of products and services. But real-time payment rails won’t mean much if the data to be loaded onto the rails can’t be accessed in real time. Fluctuations in demand require the pay-per-use flexibility of the cloud to handle sudden increases in bandwidth requirements cost-effectively.
Debit cards have recently been taking all the credit. For example, spend on UK debit cards was up 2.5% year-on-year in August 2020 while spend on credit cards was down 10%, according to the trade association UK Finance. Immediate causes include consumers forgoing large purchases during COVID-19 and stimulus checks being paid into debit accounts. Those are short-term changes.
More long-term changes will come from installments through Buy now/pay later (BNPL) programs. They were growing before COVID-19 and are now flourishing because of it. Challenges come from the way BNPL interacts with traditional card payments. Banks are concerned about their cards being disintermediated; fintechs are concerned about their “closed loop” connections with individual retailers not enjoying the “open loop” acceptance of cards on payment networks. The solution will come from network installments providing the same installments technology to banks and fintechs alike.
Banks face increasing competition from fintechs, third-party lenders and large technology companies as customer demands evolve. The opening up of the sector through innovations in banking and payments offers customers more choice as improved products and services accord them greater financial control.
