It has become fairly apparent that the financial industry needs to evolve. One initiative to take note of is Open Banking. It is a new form of providing financial services through fintech initiatives.
The Open Banking Era Begins
Regulatory decisions and new policies can transform entire industries. The financial sector is no exception to this unwritten rule. In late 2015, the new Payment Service Directive PSD2 ushered in a different era of financial services.
Due to these new rules, the focus shifted to mobile and online payment solutions. This was to be achieved through the Open Banking initiative. As is to be expected, not everyone supported this idea from day one. Some people genuinely considered this idea to be futile and expected to see an increase in financial exclusion.
What has to Change?
To create an Open Banking environment, several aspects needed to change. This entire fintech movement relies on utilizing open APIs provided by existing financial institutions. Through these APIs, third-party developers can build applications and services.
Furthermore, there are a lot more financial transparency options. This pertains primarily to users of these services and applications. Some of their data can be public, whereas the rest is kept private at all times.
All of this is to be achieved through the use of open-source technology. In doing so, all participants create a new financial system in which everything is done above board at all times.
The UK Paves the way
As is usually the case, Open Banking initially gained traction in the United Kingdom. This region has given rise to plenty of financial innovation over the decades. It is the primary region for challenger banks and neobanks, with more services waiting to emerge.
In August of 2016, the nine major UK banks were ordered to give licensed startups access to their data. This does not just include superficial information. All institutions had to give access to details, including transaction-account aspects.
Albeit the ruling only went into effect in 2018, it quickly set the tone. While only encompassing the nine biggest UK banks, smaller institutions have tried to follow suit. Combined with the general PSD2 directive, no payment account provider can avoid participating in Open Banking.
Looking Beyond Europe
The PSD2 directive only applies to the European countries. However, the Open Banking initiative gains global traction. Across the pond, Australia launched a very similar project in 2019. Domestic banks are now engaging in open API sharing to create a better financial ecosystem.
One other initiative worth highlighting is Open Banking Nigeria. Africa is a crucial region for financial innovation. Since 2017, bankers and fintechs in Nigeria are coming together to adopt common API standards. It is a very promising development, but there is more work to be done.