Open banking, which allows for the free movement of customer financial data, is one of the hottest areas in fintech.
It’s also a vital pipeline for finance apps to build better products and services. Proponents say it could democratise data and fuel a fintech revolution where credit applications are fairer and there’s less fraud.
But reality often falls short of dreams; open banking has so far seen slow adoption rates, backlash from banks, unimpressed regulators and a bullying scandal that sees its future hanging in the balance. In the UK, there are only around four million users, well behind external analyst predictions of 33m by next year.
“Open banking is literally just the pipes that allow the free movement of data,” says Rolands Mesters, CEO of Latvian open banking platform Nordigen, the first European fintech to offer free access to raw open banking data in the hopes of making it more accessible.
“There are loads of use cases that will be unlocked in the future, but they’re locked today because open banking hasn’t been adopted widely enough,” Mesters tells Sifted.
A McKinsey report from June estimates open banking could contribute 1 to 1.5% of Europe’s GDP by 2030. But it also found that only 10% of that value is unlockable today.
Given open banking’s potential, we asked Mesters about the roadblocks standing in its way.
Data sharing needs to be standardised
Open banking allows banks, financial institutions and fintechs to access customers’ financial data — with their consent. This is done using application programming interfaces or APIs, a set of computer programmes that allow apps to communicate with each other seamlessly by logging into your bank app.
Indeed, banks provide their own APIs, but these are of varying quality, despite regulatory pressure.
“There are 6,000 banks in Europe and every bank has a different API,” says Mesters.
“The data itself is complex,” he says. “Different banks offer the data in different formats. Some are better organised, some are not so you need to do some standardisation.”
Banks aren’t happy about open banking, but they’re not supposed to be
According to McKinsey, different economies have different issues when it comes to open banking. For the US, it's a lack of standardisation, while in the EU it's more the limited breadth of data sharing.
No killer use case… yet
Anne Boden, founder of challenger bank Starling Bank, recently blasted open banking, saying there’s a lack of demand from consumers and fintechs. But Mesters says this is inevitable as open banking is creating competition, while the real problem could be regulators.
“Banks aren’t happy about open banking, but they’re not supposed to be,” says Mesters. “What can kill it is if the regulators don’t see how valuable it is. That’s the biggest fear I have.”
Mesters says fintechs must start building more products that people need to use.
“The challenge isn’t to try and convince everyone about the benefits, but rather to cater to those people who believe in the technology,” he says.
For example, open banking presents a huge opportunity in ecommerce payments, where there’s still a lot of friction.
Investors aren’t looking at revenue multipliers, but the size of the market… This is a space that for the next 10 to 15 years will continue to grow, and there is an opportunity to build a company that is $100bn
OpenPayd chief growth officer Sophie Guibaud told Sifted in June that many payments are still carried out by bank transfer, which opens up room for error.
“With ecommerce payments, you cannot screw up in the reference of the payments –– if you do, the payment gets lost. With our client base, we’re talking to the ones who have large ecommerce payments by bank transfer. Open banking is just a game-changer,” she said. An open banking solution could allow for a seamless, one-click solution.
Investors, at least, remain optimistic, pumping capital into open banking and making acquisitions; Tink was bought by Visa for $1.8bn in July and MasterCard recently acquired Danish credit scoring app Aiia.
“Investors aren’t looking at revenue multipliers, but the size of the market… This is a space that for the next 10 to 15 years will continue to grow, and there is an opportunity to build a company that is $100bn,” Yapily founder Stefano Vaccino told Sifted in April.
Consumers don’t fully trust it yet
There’s also the issue of trust and data safety. A 2019 Deloitte survey found that with open banking 69% of consumers had concerns over identity theft and 60% were worried about misuse of data.
Mesters says it’s good for people to be cautious, but open banking is really just a new way to share data. He adds open banking can only work with consent and APIs are safer than sharing banking passwords.
“It’s only natural people are sceptical, it’s survival instincts,” Mesters says. “But open banking has been around for a long time, it was just called banking… bank statements and documents have been proof of income, proof of home address for decades. Open banking is just electronically enabling something that was already possible, saving time, paper and creating new possibilities for consumers.”
Open banking is just electronically enabling something that was already possible, saving time, paper and creating new possibilities for consumers
Open banking APIs also offer a much better alternative to screen scraping, which is when third party companies access financial data by logging into digital portals on behalf of an institution’s customers using their passwords and usernames. Mesters says a lot of open finance still relies on screen scraping, which Mesters says is a security threat.
Dmitry Dolgorukov, cofounder at lending software company HES Fintech, also says open banking provides consumers with more transparency and control. “Screen scraping leaves users vulnerable to having their data shared in ways they’re unaware of,” he told Sifted. “I believe customer-permissioned data is the way out. API platforms can serve as a single secure gateway for secure data sharing with third-party apps and help limit an abundance of risky connections.”
But user education is key; research found consumer awareness of open banking in the UK is low, with many unaware of its existence and 63% of people saying they have not made use of open banking.
“It’s similar to initial perceptions around contactless payments. I remember myself being sceptical; the world isn’t supposed to work like that, but lo and behold most of our payments now are contactless,” says Mesters.
Open banking is still relatively new, and earning consumer trust is a natural part of its evolution. More regulation is required to increase data security but for Dolgorukov, open finance’s positives outweigh its negatives.
“As a tech optimist, I believe that data sharing in open finance is going to improve convenience and personalisation, with drawbacks and threats taken under control step-by-step. Better financial products, higher customer retention and the development of new markets are worth the effort and initiative.”
Nordigen is the first free European open banking API. Get free access to bank data and premium data insights here.