It used to be that a person would open their first bank account at the same bank their parents used or a bank with a convenient branch nearby—and likely become a loyal lifetime customer. They would start with checking and savings, and perhaps move on to credit cards, auto loans, mortgages and investment services.
The fintech revolution has changed how people view their banking options—and their finances—dramatically. Although there were some voluntary examples of collaboration, nothing has driven the rise of fintechs in banking as much as the Payment Services Directives, especially PSD and PSD2 in Europe.
PSD2 was designed to improve customer authentication and secure payment processing across Europe, and it ended up ushering in one of the greatest challenges the banking industry has ever confronted. Put into force starting in early 2018, PSD2 had the goal of making payments safer, providing additional consumer protections and fostering competition and innovation. One major requirement was for banks to allow access to customer account information for Third-Party Providers (TPPs), triggering an explosion in fintechs competing to offer services that had traditionally only been provided by banks and credit card issuers; fintechs began to offer disaggregated and disintermediated banking services, payments services, personal finance applications, mortgages and personal loans, investment services and more.
Banking had always operated as a near-monopoly dominated by a small number of major players. Many banks assumed their customers would remain loyal and be reluctant to trust a mobile app with the details of their private financial information; however, consumers wanted choice and, as it turned out, were more than willing to share their information for convenience, a better user experience and to take advantage of new products and services. The increased competition has forced banks to innovate, improve their offerings and their customer service, and in some cases lower their costs. Some banks have developed new applications, acquired fintechs, or partnered with other banks to provide the services consumers are demanding.
And now, with the issuance of a new executive order by President Biden, Section 1033 of the 2010 Dodd-Frank Act may finally see more movement in the United States. The Consumer Financial Protection Bureau has been encouraged to set regulation on consumer financial transaction data access and sharing. But lack of regulations doesn’t mean data sharing/open banking isn’t happening in the US. In fact, an industry-driven, free, API-based standard for sharing financial data between banks, credit unions, fintechs and just about any business entity is already enabling more than 12 million consumers
From monolithic monopoly to an interconnected web
Many of the bureaucratic procedures inherent in traditional banking are being eliminated through automation and simplification. Fintechs offer their users control over their financial lives and alternatives to traditional bank lock-in. Customers are no longer hampered by the need for physical branches, keeping their entire financial lives with one institution, or the hassle of moving their accounts when they want different services. An account holder can simply use one bank to hold their money and connect the account to a service provider that offers more convenience or better customer service for managing finances or making payments.
Open Banking has radically altered the payments landscape, enabling users to take advantage of a variety of fintech services to pay for retail transactions and bills, to pay back a friend, buy and transact in crypto currencies, send money abroad, etc. Registration has become easier, eliminating the need for laborious onboarding processes; this has increased user confidence in fintech apps, so much so that many customers are comfortable enough to download and “test drive” several apps until they find one that works for their needs. Many fintechs are also leveraging customer data to provide financial services and products to customers who may not have been aware they needed the service or those who may have traditionally been overlooked by a bank because of their credit rating, increasing the availability of loans or credit to a new segment of customers.
The door has been opened—and the pace of change will only increase
Payments is an area that has already undergone a great deal of transformation under open banking and has paved the way for alternative payment channels that are more convenient and faster than legacy payments processing. It’s becoming increasingly common to pay for goods or services seamlessly and securely without ever having a card present; however, most transactions are still processed as if they were paid for with a credit or debit card. And open banking makes it possible to pay for transactions directly from a bank account or digital wallet, which will decrease clearing time and put downward pressure on transactions costs.
Open banking will continue to change how consumers view their banking options, providing opportunities and posing challenges to FIs, merchants and card processors. As fintechs further innovate our financial lives, it’s entirely possible that in the near future, we’ll see the emergence of new payments paradigms and authentication methods that are completely independent of both payment cards and bank accounts.
Is your organization ready for the innovations in payments? Let’s discuss how we can help you identify new opportunities to leverage this quickly evolving space.