In recent years, traditional retail banks have faced stiff competition from new market entrants, including challenger banks and FinTech firms that are often less restricted by costly legacy systems. At the same time, changing consumer demands for faster, tech-focused services has diminished the relationship between banks and the customer, creating a new environment of open banking.

Open banking is the UK’s version of the second Payment Services Directive (PSD2), which was implemented in mid-January. Open banking and PSD2 force UK banks to open up their data via a set of secure application programming interfaces (APIs), shifting banks from being one-stop-shops for financial services to open platforms, where consumers can start to embrace a more modular approach to banking by consenting to verified third-parties directly accessing their data. This is set to fundamentally change how banks and FinTech companies act and interact, introducing a range of new market challenges and opportunities for both financial services providers and consumers.

Below, Matt Smith, CEO of SteelEye, the compliance tech and data analytics firm, explains what he believes to be the opportunities and challenges facing open banking, and its wider impact on consumers.

Product and service innovation

Open banking’s data sharing rules are aimed at encouraging competition between banking providers and helping to drive the implementation of new technologies that will make banks agilerClick To Tweet

One significant opportunity under open banking is likely to be the encouragement of rapid and significant innovation in the financial services market. Open banking’s data sharing rules are aimed at encouraging competition between banking providers and helping to drive the implementation of new technologies that will make banks agiler. When startups and challenger banks have access to the same data that established banks have previously held a complete monopoly over, innovation will be encouraged as financial services companies create new products and services to distinguish themselves from their competitors.

For businesses, open access to customer data provides them with insight into consumer behaviour which allows them to validate and align new offerings and initiatives. For example, with insight into consumer needs, banks can offer deals on products including overdrafts, insurance and mortgages.

Through innovation, consumers are provided with the ability to quickly compare accounts, helping them to understand where they can get the best products and savings. Personal financial management could now be offered by an array of financial service providers, from established banks to charities, in a move that encourages customers to shift from traditional ‘under one roof’ banking services to specific, individualized services that are suitable for their personal financial situation.

Industry collaboration

Another significant advantage of open banking is that it encourages collaboration between banks and FinTechs.

Crucially, both providers offer something that the other cannot. With so many players in the financial services industry and so much choice for consumers, forming partnerships with their FinTech competitors could help banks both to survive and expand their services in such a rapidly evolving industry. Although PSD2 forces current account data to be shared, other information – such as savings accounts, direct debits, and demographics – isn’t included, giving banks an advantage not held by newer FinTech firms.

Most forward-thinking banks will use this advantage to form new partnerships with their competitors, and by opening up to collaboration between banks and FinTech firms, any new products will see the benefits of both ends of the spectrum. Partnerships between banks and FinTech firms will include not only the credibility, trust and customer base of a traditional bank, a vast database of account data, and direction on strategy and the regulatory market; but also the new, agile and low-cost technology offered by the FinTech companies.

Challenges facing providers and consumers with open banking

One of the main challenges facing open banking is security. The majority of companies that are championing open banking are small FinTech companies, not tech giants like Apple and Google, and a lack of homogenous technical standards, such as certain security requirements, combined with complex internal technology systems may make the process susceptible to corruption and fraudulent activity. By creating complex chains of data access, it also makes it harder to prove who was at fault following a theft.

Another concern about open banking is liability, as inserting third-party providers into the banking process increases the risk of scammers gaining access to customer information and their finances. Under open banking, consumers should have any losses replenished by their bank unless there is reason to suspect fraud or negligence, but with both banks and FinTechs alike facing increased security threats, without proper legal clarification it’s inevitable that providers will try and blame a third party.

Finally, a lack of education and awareness around open banking’s capabilities has made consumers less likely to consent to their data being shared, limiting banks and FinTechs ability to innovate. Recent research by Accenture shows that two-thirds of consumers would not be willing to share their personal financial data with third-party providers while in September, independent consumer review body, Which?, revealed that 92% of consumers had never heard of open banking. To negate this, banks and FinTechs must educate consumers on the ways in which open banking can improve how they organize and take control of their finances, including through monitoring spending and making better saving and investing decisions.