Open Banking 2021 – Thematic Research

Open Banking Market Overview

Open banking creates a multidimensional view on what the core value in banking is. No longer just interest-bearing products, but data, technology; and not just to end users, but to businesses, new entrants, and other banks. The ability to disaggregate component pieces of value, and to distribute them in multiple forms, becomes a core competency in the open banking era. Financial services regulators around the world are increasingly concerned with promoting competition and innovation in banking, reducing barriers to entry, and empowering consumers. The provision of banking services in most developed markets has traditionally been dominated by a few large incumbents, leading to a landscape characterized by inertia and a lack of dynamism. New entrants have found it difficult to break into the banking market, and therefore, competition has been limited, leading to sub-optimal outcomes for consumers. In response to this situation, financial services regulators around the world have tried various initiatives to boost competition and consumer choice.

Open banking seems too significant and far-reaching strategy. Here, consumers have the power to share their account and transaction data with chosen third parties. The favored method for sharing banking data is through APIs, which are simply sets of instructions that allow an IT system (such as one belonging to a bank) to communicate with another IT system (such as one belonging to a fintech provider). In order to minimize compatibility issues, APIs are typically designed around common standards governing the security, formatting, transmission, and accessibility of data.

What are the market dynamics in open banking sector?

Technological trends: Cloud migration to enable secure openness, unbundling of the value chain drives ‘platformification’, AI-driven analytics, payment initiation service providers (PISPs) are few of the technological trends in the open banking. Open banking offers clear opportunities for enhanced personalization across all elements of consumer interaction by giving algorithms more data to limit bias and enhance predictive power. Due to COVID-19, the volume of fraudulent activity has significantly increased. To help protect data, a growing number of companies store their data on cloud platforms and implement machine learning to take a more proactive approach to threat detection and identify a wider variety of attack vectors across their network and platform.

Macroeconomic trends: Open banking initiatives the world over lower barriers to entry, around access to bank data and in allowing niche players to partner to ‘re-bundle’ banking and represent a more viable alternative to incumbent full-service providers. Research from the Open Banking Implementation Entity (OBIE) and Ipsos MORI showed that 50% of SMEs surveyed had begun using open banking since the start of the pandemic. 

Regulatory trends: A transition to an open data economy will require that banks invest in advanced analytics tools that enable them to aggregate external datasets and customer-mapped data. Perhaps even more importantly, banks will need to drive a culture of data-sharing and data-driven decision-making across the business, making use of machine learning and artificial intelligence to enrich insights.

What are the segments in the open banking value chain?

D2C: D2C includes a wide range of existing bank products and services but enhanced by personalization and improved security and UX (on account of API use instead of screen-scraping or client-side aggregation). These include but are not limited to credit decisioning/profiles, payments, onboarding, aggregation, and spending insight.

As a service: Within BaaS, there are pure-play BaaS banks (Solaris) and providers that also have a D2C model (Fidor, BBVA, etc.). Typically, these players use D2C as a proof of concept for the B2B proposition. Within B2B BaaS, we split into two categories: those offering the banking license and those focusing on the underlying technology capabilities. Within the banking license BaaS provision, providers typically focus on plugging providers into local infrastructure to support domestic/international payments, card networks, bond markets, equity markets, and Treasury.

B2B/B2B2C: B2B services typically include various types of open banking-enabled data sold in aggregated, anonymized form to third parties to support commercial objectives. It can also include developer portals, where third parties have access to bank data in a sandbox environment to develop new and innovative services for the bank’s customers or as a standalone proposition to be sold by that new entrant or startup. In terms of bank capabilities, this creates a series of channel management and UX priorities around APIs as apply for any other channel (mobile, online, etc.).

Marketplace/platform: ‘Marketplace’ and/or ‘platforms’ are heavily overused, nebulous terms within financial services. Here, we refer to any bank proposition that includes third party distributors for product or service. These can be marketplaces of loans from banks but also non-bank providers.

Open banking sector, by segments

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Which are the key players in the open banking sector?

Backbase, Finastra, Mambu, Thought Machine are few of the players in various product areas of open banking sector.

Open banking sector, by key players

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Market report scope

Scope:

• The UK has the highest number of open banking licenses issued to payment initiation service providers (PISPs), which enable users to withdraw money directly from their accounts; same for account information service providers (AISPs), which let users see all their payment account information from different bank accounts in one place (i.e., aggregation).
• Globally, 70% of 75+ customers do not want third-party access to accounts regardless of what the service benefit may be (insight, credit, etc.), with that number falling to 20% for younger customers.
• Where customers do want open banking, it’s primarily for heightened security, such as more secure online payments through PISPs for online purchases.

Reasons to Buy

• Understand key technology, macroeconomic, and regulatory trends characterizing open banking.
• Access the latest consumer survey data on evolving channel behavior, provider preferences, and product holdings.
• Identify the leading digital transformation efforts based on cost income and customer satisfaction metrics.
• Access firm-level/case study insights on leading players within the open banking theme.