Blog: Exploring the Open Banking Opportunity for Financial Institutions

November 14, 2022  |  MICHAEL ENGEL

Technological innovation has transformed the banking and financial services ecosystem with new fintech entrants forcing their way in.

The fintech and alternative payment methods (APM) market is now booming. Players in this segment are at the forefront of innovation, satisfying consumer expectations with streamlined services for paying bills, sending payments, consolidating personal finance, applying for loans, and investing in cryptocurrency.

While this is shaking up the competitive landscape, it’s not necessarily bad news for banks.

Historically, banks thought about fintech as a threat. As fintechs continue to enter this market, we are seeing banks go from resisting to observing to now actively seeking partnership with fintechs to bring extended solutions and services to their ecosystem.

Such partnerships benefit both sides significantly. Banks can offer innovative, value-added services to consumers without significant technology investment, enabling them to maintain their focus on their core business while increasing customer loyalty. Fintechs gain access to the bank’s brand as well as extensive client portfolio.  Most banks have spent years and considerable investments in their brand – resulting in a high level of trust from their customers.  This trust is enabled by stringent regulatory compliance.  Fintechs have struggled to achieve those trust levels, thus partnering with banks allows them to not only integrate into the banking ecosystem without having to navigate its complex regulatory landscape but acquire trust.

Consumers also benefit from these partnerships. For example, by developing solutions that consumers can use to consolidate financial accounts from various banks, FI-fintech partnerships provide people with previously unavailable personal finance management options, enabling them to enjoy greater control over their data and save time and money with genuinely useful tools. Another example is embedded finance. Non-financial organizations can integrate financial tools into their service, such as buy-now-pay-later (BNPL) at retail establishments or instant payments for services such as Uber.

Many of these collaborations are taking place in the Open Banking space, “which is the practice of financial institutions (FIs) providing open, consumer-permissioned access to financial data through the use of standardized application programming interfaces (APIs).

APIs allow two or more applications to communicate with each other, essentially providing a common language for sharing the consumer’s financial data. With this direct data access, consumers can seamlessly connect to a myriad of apps and services without direct interaction with their FIs.

What is driving open banking adoption?

Open banking is not a new concept but it is one that is evolving quickly, driven first by European regulation. In 2015, the European Parliament announced its Revised Payment Services Direction (PSD2) directive. This was adopted into UK law in 2018 and other European countries, especially in the Nordic region, followed soon after.

The prime driver of PSD2 was to break up the monopolization of a few very big banks and prevent a financial meltdown like 2008.  This desire to create a more level playing field for smaller players was the initial driver, yet the impetus to make payments more secure, boost innovation, and help banking services adopt new technologies accelerated it. Many third-party applications have emerged and flourished as a result, including UK budget tracker apps Yolt, Chip, Plum, Money Dashboard, and Emma.

Elsewhere, the demand for consumer-directed finance solutions is driving open banking’s adoption. According to Fintech Effect 2021, a research report from Plaid, nearly 90% of Americans rely on digital solutions to manage their money, and they typically have three or more fintech apps on their mobile phone. The Covid-19 pandemic has undoubtedly played a hand here, supercharging the digital financial revolution and increasing consumer demand for financial inclusion.

The absence of a federal regulatory framework is slowing adoption slightly in the US. By leaving it up the individual institution whether to share their customer data, there is a degree of uncertainty for consumers. Moreover, the market is fragmented by its wide range of players in both the US and Europe.

Open banking is poised to take off in the rest of the world. In Asia-Pacific, the existing extensive digital ecosystems and consumer willingness to share data create the perfect environment for open banking adoption rates to skyrocket. Singapore is currently the most advanced market in the region, followed by Australia and China. The market is also being tested in the Middle East, Africa, and Latin America, where open banking infrastructure is currently being built and pioneered by start-ups.

Open banking is powering collaborations

The key for banks is not to feel they have to adopt open banking because it’s a regulation in their region, but rather to turn this mandate into an opportunity. It goes back to the case for collaboration between traditional banks and fintechs. With open banking, FIs can see how their customers are using fintech to manage their finances, leading to a better understanding of the consumer’s financial needs and creating the potential for new innovations and customized products and services. Banks can also drive consumer engagement and loyalty through third-party applications, increasing transaction volumes.

Open banking provides a new way to increase revenue for banks who are willing to think differently. There is an opportunity to refer customers and cross-sell products through these collaborations.

There are many advantages for both banks and fintechs. Ultimately, however, both sides’ focus should be on the consumer. Open banking offers consumers more choice and control, along with increased financial literacy, financial inclusion, and innovative experiences. It also improves data security by removing on-file credentials from the fintech ecosystem, where they were previously vulnerable to data breaches by bad actors.

Ironically, Open Banking is a regulatory and technology situation that the bigger banks can more readily respond to – so there are unintended consequences. Banks must ensure they are equipping themselves with the platforms and tools needed to thrive in this new era. Designed to enable such innovation, Diebold Nixdorf’s Vynamic® Payments platform is a modern, cloud-native infrastructure which can ‘plug and play’ to meet future technical standards with flexibility and scalability.

Under open banking frameworks, third-party partners are exponentially nudging a bank’s infrastructure with requests for account information, payment permission, and live data feeds. The risk of an overload on a bank’s network is heightened. Vynamic Payments platform is a highly stable system capable of supporting high-volume, real-time data requests with availability and reliability.

Open banking is inevitable. Only those who treat the trend as an opportunity to redefine and prioritize what they add in this value chain will win customer loyalty in both the short and long term. As this wave of APIs and innovation gathers pace around the globe, Vynamic Payments is equipped to power FIs with the tools they need to successfully seize this opportunity and drive seamless and innovative digital experiences for consumers.

Learn how Vynamic Payments can accelerate your adoption of Open Banking.

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