Open Banking has been a disruptive innovative force to the financial industry since its inception in 2017. Its high-leverage usage of enhanced APIs has handed financial entities the ability to transform their product offerings.
Huw Davies, Co-CEO of Ozone API, explores how Open Banking is having a transformative impact in markets that have typically been underserved and forecasts its potentially limitless future.
It’s fair to say that today’s financial system works incredibly well for people with predictable lives and incomes. The chances are that if you’re reading this article, you’re one of them. Access to financial services, particularly in markets such as the UK, is something which is all too easily taken for granted.
But the reality is that financial inclusion is a major issue around the world. A staggering 31% of the global adult population – over 1.7 billion people – lack access to formal financial services that are crucial for economic security and mobility.
The divide disproportionately impacts marginalised groups across socioeconomic status, gender, race, ethnicity, age, ability, sexual orientation, immigration status, and education levels. And it’s not as linear as developed versus emerging markets, either; even in the UK, one in four adults will experience some form of financial exclusion at least once in their lives.
These lockouts trap individuals, households, and entire communities in cycles of poverty and limit their ability to pursue education, start businesses, accumulate savings, or manage unexpected expenses.
While a number of digital technologies and changes to national policy have cleared away some of the obstacles that kept these services out of reach for many, it’s indisputable that tough challenges remain to close the remaining gap. So, how can we build resilient and truly financially inclusive economies?
Enter Open Banking
Open Banking has the potential to be a powerful catalyst for economic expansion, driving growth through improved access to credit via better lending decisions; increased investment and new business creation; and greater financial inclusion.
At its core, Open Banking facilitates the secure sharing of customer data between banks and third parties, with consumer consent. This exchange unlocks a wealth of opportunities by providing fintechs, lenders, and other firms with deeper insights into an individual’s true financial situation.
For too long, access to credit has been constrained by lenders’ limited customer data and legacy underwriting models that fail to capture the full financial picture. Open Banking addresses this through permissioned data sharing, allowing lenders to access a more comprehensive view of a customer’s income, spending patterns, recurring subscriptions, and other cash flows.
This richer data provides the insights needed for more informed and accurate lending decisions. Lenders can better evaluate repayment risk for thin-file and no-file customers who have been traditionally underserved due to limited credit histories.
The untapped potential of Open Banking
At an economy-wide level, responsibly expanding access to credit for productive investments unlocks economic potential, helping money flow to small businesses, consumers, and thin-file borrowers.
A particularly relevant use of Open Banking in emerging economies (although applicable everywhere) is building a credit history. In the Middle East, for example, there are large amounts of gig workers that have come to the region from elsewhere. Because of the long time it takes to build credit histories, they struggle to access credit. Open Banking can help consumers build a credit score far more quickly.
But Open Banking’s economic impacts extend far beyond just improved underwriting. The secure data exchange serves as a platform for innovation, enabling nimble fintechs to build compelling consumer and commercial products like personal financial management tools, invoice financing solutions, subscription management dashboards, and online account opening systems supercharged by automatic data population.
Take the example of a small merchant in Latin America, where you deal in cash almost exclusively because card payments are expensive and settlement takes too long. Open Banking solves those problems, eliminates the risk of holding large volumes of cash and generates a transaction history for the merchant, thereby generating opportunities for them to access credit to grow their business.
It’s clear that Open Banking is an exciting frontier, attracting investment and driving expansion of the fintech sector. Around the world, the Open Banking market is projected to soar to $203.8bn by 2033, with new investment flowing into hundreds of regulated firms. These innovative players are also creating thousands of high skilled fintech jobs.
Tracking Open Banking’s true impact
As Open Banking propels both economic expansion and financial inclusion, measuring its tangible effects through robust metrics will be crucial. Prudent data points to track include API calls, venture capital invested in Open Banking-enabled fintechs, partnership levels between incumbents and innovators, and growth rates of Open Banking-related fintech roles, like API developers and compliance officers, spotlighting the ecosystem’s vibrancy.
To evaluate inclusion impacts, key indicators are the diversity of new Open Banking products tailored to underserved groups, consumer engagement rates with these offerings, and improvements in credit accessibility for previously excluded populations. Cross-domain benchmarks like consumer trust surveys and regulatory compliance can further illuminate Open Banking’s progress over time.
Monitoring a balanced scorecard of investment, employment, and inclusion metrics will be vital for quantifying Open Banking’s socioeconomic impacts and guiding its positive momentum. But the infrastructure is in place, and the evidence is piling up that Open Banking is a pivotal economic enabler.
Sustaining momentum now hinges on a shared commitment to responsibly develop Open Banking into an engine for growth, inclusion, and shared prosperity for all.
