Open Banking has taken on a life of its own since its inception in 2017, with its importance in the finance space elevating to new heights.
Axway’s SVP of Financial Services and Open Banking: North America, Laurent van Huffel, spoke to Payment Expert on the evolution of Open Banking and what lies ahead for the financial instrument.
Payment Expert: Firstly, can you identify some of Open Banking’s recent developments going back from last year and what do you foresee the revolutionary tech to progress in this year?
Laurent van Huffel: Increased adoption. Open Banking has seen increased adoption worldwide, with more countries introducing Open Banking regulations and more financial institutions joining the movement.
In the US in particular, FDX – the de facto API standard for open banking – has seen a significant uptick from 32m to 42m consumer accounts using FDX APIs between Spring 2022 and Fall 2022
Major Account aggregators such as Akoya, Finicity Envestnet, MX and Plaid keep expanding but also must meet the upcoming CFPB regulations that would mandate banks to remove screen scraping – the method that is currently in use to access customer information. Although they had already begun doing this using proprietary APIs, they are increasingly moving towards open standards like FDX.
Although it is always a difficult exercise in such fast pace ever changing tech world, here are some of the key highlights we see:
Increased competition: As more players enter the market, there will be increased competition, leading to more innovation and better services for customers. We expect innovation will be the strongest in market-driven economies where free competition is the rule, despite the early gains or heavily-regulated regions.
The growth of Open Banking in emerging markets continues to be significant with interesting development in the Middle-East and Africa.
The integration of Open Banking with other technologies: Open Banking will be integrated with other technologies, such as blockchain and artificial intelligence, to create even more innovative and efficient financial services.
More collaboration: Financial institutions will collaborate more with fintech startups and technology companies to create new Open Banking solutions and drive innovation in the industry.
PE: An Open Banking Excellence report revealed that the UK could lose its number one position in the Open Banking sector. How likely could this happen and which countries are emerging to take this spot away from the UK?
LVH: While it is always a difficult exercise to predict the future, especially in this current banking environment, several countries could challenge the UK in their leading position.
Australia: Australia has been a leader in Open Banking in the Asia-Pacific region.
The country has implemented a Consumer Data Right (CDR) that allows consumers to access and share their data with third-party providers. The CDR has the potential to create a vibrant Open Banking ecosystem in Australia.
Singapore: Singapore has been promoting Open Banking as part of its efforts to become a leading fintech hub in the region. The country has implemented an API Exchange (APEX) platform that allows banks to share customer data with third-party providers in a secure and standardised way.
United States: The United States started late compared to others, but we believe they will rapidly catch up and take a leading position in open banking in the near future thanks to the standardisation started by FDX who has already 42M consumer accounts using FDX APIs but also because the sheer size of the banking market.
PE: Can you explain to us why businesses are moving towards functions such as treasury on-demand and wealth management and are these likely to explode in usage this year?
LVH: Treasury on-demand refers to the use of technology to automate various treasury functions, such as cash management, risk management, and financial reporting. This technology allows businesses to streamline their treasury operations, reduce costs, and improve their overall financial performance.
Treasury Management has seen rapid transformation in recent years due to the move to real-time payments. Today, treasurers want to access, manage, and forecast their cash positions in real-time and on a global scale.
One of the key drivers of the trend towards treasury on-demand and wealth management is the increasing availability of advanced technology solutions. Cloud-based software, AI and machine learning algorithms, and other cutting-edge technologies have made it possible for businesses to automate many of their financial processes and gain better insights into their financial performance and reduce fees.
Another factor contributing to the popularity of these functions is the increasing complexity of the global financial system. As businesses expand into new markets and deal with multiple currencies and regulatory environments, the need for sophisticated financial management tools and expertise has grown.
PE: Are there opportunities for crypto/web3 firms to tap into open banking functions despite the recent struggles to create an alternative route for different audiences?
LVH: Yes, there are certainly opportunities for crypto/web3 firms to tap into open banking functions, despite the recent struggles to create an alternative route for different audiences.
For example, they can offer services such as crypto wallets that allow users to store and manage their digital assets, or decentralised exchanges that enable users to trade cryptocurrencies directly without the need for intermediaries.
Furthermore, the adoption of open banking has been driven in part by changes in regulatory frameworks that are aimed at increasing competition and innovation in the financial sector.
However, it is important to note that the regulatory landscape for crypto and web3 firms is still evolving and can be complex, with different jurisdictions taking different approaches.
PE: Are there any open banking or financial regulatory developments coming up this year that could impact the sector?
LVH: Yes. In the US, the Consumer Financial Protection Bureau (CFPB) announced last year in October an important upcoming open banking regulation for early 2024. Canada is working on their own regulation, and it is predicted that they will also adopt FDX as the API standard. Brazil, which launched an open banking regulation in 2021, is now working on open insurance regulations.
Multiple countries in Africa, middle east and eastern Europe are also working on their own regulation. Whether a regulation exists, or it is market-driven, Open Banking is a global movement that is only going to get bigger.
Digital identity is becoming increasingly important in the financial sector, as more services are being offered online. Several countries, including the UK and Canada, are working on developing digital identity with consent management frameworks that could have significant implications for financial services providers.
Environmental, Social and Governance (ESG) Regulations are becoming an increasingly important consideration for investors and regulators alike. This year, we may see more regulatory developments related to ESG, particularly in Europe, where the EU is working on a Sustainable Finance Disclosure Regulation (SFDR) that will require financial firms to disclose how they integrate ESG factors into their decision-making processes.
PE: How are Axway’s APIs enabling companies to access and utilise Open Banking/Finance technology?
LVH: Account aggregation predated open banking, which relies on the ability to securely share financial data. Historically, it was done via screen scraping: a customer logs in to their primary checking account, 401k, and credit card via an aggregator’s platform and then allows that aggregator to collect data from their accounts, logging in as if it were them and “scraping” on-screen data.
But screen scraping has its limits. For one, it isn’t particularly secure, and connections often break or need to be reset. This is where APIs come in – the enabling technology for open banking. What Axway enables financial institutions to do is to expose data via standard open banking API – the FDX API in the US for instance – which fintechs or other partners can securely connect to and leverage in an app or for other backend use.
Using Open Banking APIs, an aggregator can connect directly to a person’s raw account data, with their consent. By leveraging actionable intelligence gained from account aggregation – whether you choose to become an aggregator yourself or partner with a third-party aggregator – banks can gain a richer understanding of their customers and develop new business models to better serve them.
