Wednesday W.O.W - Open Banking 🌐💱
[6 min read] Your mid-week bite sized treat on emerging tech on our journey to the Metaverse. Today, learn about how Open Banking accelerates the digital financial infrastructure of our future economy
A nibble of knowledge in your inbox every Wednesday with a simple format:
🇼 What the technology is
🇴 Objective(s) - what is it trying to achieve, with some examples
🇼 Why it is important to users as well as businesses & brands.
This is week 22 of the 520 weeks of writing I have committed to, a decade of documenting our physical and digital lives converge.
🇼 What is Open Banking?
Open banking is an ongoing global initiative that aims to reduce poverty, give equal opportunities to everyone, and provide financial inclusion to the unbanked population.
It democratizes access to financial services through application programming interfaces (APIs) that allow third-party developers to create or customize applications and services for financial institutions.
All these transactions and data analytics are done within secure networks using various encryption security protocols.
🇴 Objectives of Open Banking?
Financial Inclusion
Open banking enables democratised access to global banking services through smartphone applications and partnerships with major financial institutions.
The World Bank’s 2021 Global Findex Database states that 1.4 billion adults globally do not have access to formal financial services (unbanked). The main reasons are lack of money, the distance to the nearest financial institution, and insufficient documentation.
Statista reports that the number of global open banking users is forecast to grow at an annual rate of about 50% between 2020 and 2024, reaching 132 million by 2024. The value of global open banking payments is expected to hit USD $116 billion in 2026 (plays into my investment thesis)
Diversification of Services
Open banking allows financial institutions to diversify their services, transitioning from traditional operations to the more flexible banking-as-a-platform model.
The platform-based model also allows banks to embrace future technologies, including more intuitive chatbots, user-centred app designs, and virtual and augmented (VR/AR) realities. Critical in the Metaverse!
Expanding Market Reach
By shifting to better ways to reach their customers, financial institutions can expand their market reach.
Two such demographics are young people who prioritize convenience and accessibility, and those who do not have access to formal financial services.
Challenges & Barriers
Data privacy. With open banking, consumers must provide consent to share their financial data with third-party providers. While regulations like the EU’s General Data Protection Regulation (GDPR) provide some protection for consumers, there is still the risk of data breaches or misuse of data. It is essential for financial institutions and third-party providers to prioritize data protection and transparency to ensure that consumers' personal information is secure.
The need for standardization and interoperability between different banking systems and platforms. Open banking requires collaboration and integration between financial institutions, fintechs, and other third-party providers. However, different systems and platforms may have different standards and protocols, making it challenging to ensure interoperability and seamless data sharing.
Open banking requires significant investments in technology and infrastructure. Financial institutions and third-party providers need to develop robust APIs, data analytics systems, and security protocols to ensure the smooth operation of the system. This investment may be a barrier to entry for smaller fintech and startups looking to compete in the open banking space.
🇼 Why is Open Banking Important?
Enabling thriving virtual economies
In the emerging metaverse, open banking can play a significant role in enabling transactions within virtual environments. As more people spend time in virtual worlds, there will be a growing demand for financial services that can be seamlessly integrated into these environments (ie buying virtual assets within a metaverse and paying for them with real money through a secure and convenient open banking integration).
Open banking could also be used to enable microtransactions within the metaverse, allowing users to pay small amounts for in-game items or other virtual goods.
Transcending geographical & political boundaries
As emerging markets access an increasingly digital global economy, open banking is an “equaliser” that provides financial inclusion, improves access to credit, and fosters innovation in financial services. In many emerging economies, traditional banking services are limited, and many individuals and businesses lack access to formal financial services.
By providing open access to financial data and infrastructure, open banking can enable the development of new financial products and services that better meet the needs of consumers and businesses. This can promote economic growth and financial stability, and healthy competition in the financial services sector.
Reducing inequality
This alone is never a motivation for adoption (the harsh reality) but it is a nice outcome nevertheless. Here are some examples of such objectives:
Provide Equal Opportunities: Open banking democratizes access to financial services and provides equal opportunities to everyone, regardless of their location, politics, social status, or financial situation.
Improve Financial Literacy: Open banking can improve financial literacy by providing more accessible and intuitive financial services to users. With everything accessible and convenient, users no longer have to go to the nearest physical bank that might be too far from their locations. Instead, they can conduct multiple financial transactions through just one app or digital ecosystem.
Foster Innovation: Open banking fosters innovation by allowing fintech and startups to partner with financial institutions to create new services or enhanced offerings. As financial institutions understand their strengths and weaknesses, they can outsource some of their services to other providers, reducing long-term operating costs.
Bonus - Case Studies:
Revolut is a UK-based digital banking app that offers users a wide range of financial services, including foreign exchange, cryptocurrency trading, and budgeting tools. The company has embraced open banking, allowing customers to connect their accounts with other banks and financial services providers to manage all their finances in one place.
Monzo is another UK-based digital bank that has embraced open banking. The company's app allows customers to connect their accounts with other banks and financial services providers, giving them a complete view of their finances. Monzo also offers a range of financial tools, such as budgeting and savings tools, that help customers better manage their money.
BBVA is a Spanish multinational financial services company that has been at the forefront of open banking. The company has launched several initiatives to promote open banking, including an API marketplace that allows third-party developers to access BBVA's data and services. BBVA has also partnered with other banks and fintech companies to develop new financial products and services.
Fidor Bank is a German online bank that has fully embraced open banking. The company's API platform allows third-party developers to create new financial products and services that integrate with Fidor's banking platform. Fidor has also partnered with other banks and fintech companies to offer its customers a wider range of financial products and services.
Starling Bank is a UK-based digital bank that has made open banking a core part of its business model. The company's API platform allows third-party developers to create new financial products and services that integrate with Starling's banking platform. Starling has also launched its own marketplace, which offers customers a range of financial products and services from other providers.
That’s all for this week! If you have any organisations in mind that could benefit from learning about emerging technology, be sure to reach out. Educational workshops are one of many consulting services I offer.