Horizons Newsletter – week 6 // 2021
Horizons is a bi-monthly Dasym Research initiative to show you how the Dasym themes have been in the news. We publish the Horizons on our website and as an email newsletter. If you wish to receive the email, please contact Investor Relations.
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The trend towards openness
Once vertically integrated, the delivery of financial services to customers is increasingly being unbundled and offered by non-bank third parties, such as fintech firms. These third parties are creating new, innovative services for which they need access to a customer’s personal banking data. While the sharing of bank-held customer data is not new, the use of open application programming interfaces (open APIs) enables third parties to develop compelling value propositions while leveraging access to bank resources (data) and putting the customer in control. Meanwhile, open banking is only the beginning of a broader trend towards “open finance” and “open everything”. Open finance will bring the foundations of open banking to a wider range of financial sectors and products (such as mortgages, insurance, pensions), with the aim to provide a total focus on the financial life of individuals. The ultimate goal, however, is “open everything”, where open APIs power industries and sectors to drive interoperability and encourage full-scale competition and disruption. For instance, a bank with access to energy data could notify a consumer about a cheaper provider.
Opening up new open banking use cases
Opening up financial data to third-party providers enables new uses of that data. Finance management, one of the most common open-banking use cases, has seen increased adoption during the pandemic. These services aggregate data from different accounts and give consumers insight into their financial health and potential savings. Digital banking service Revolut, for example, uses current account data to help users save money on loans, credit cards and overdrafts. Savings platform Plum, meanwhile, offers financial insights and allows users to set spending caps. Besides finance management, open banking can also remove several (administrative) hurdles, for instance in the onboarding process for new customers. Instead of filling out long application forms that require hard-to-access financial information, open banking applications help users fill out such applications automatically by aggregating their financial data. These examples show the potential of open banking services. To further encourage adoption, truly compelling propositions are necessary, such as products that help consumers avoid going into debt or nudge them when new mortgage rates are on offer.
Open banking will benefit from standardization
Around the globe, open banking is experiencing momentum. Frontrunners are the U.K. and the E.U.; the introduction of the second Payments Services Directive in January 2018 has been a template and a catalyst for many open-banking initiatives around the world. Nevertheless, countries and regions are taking different approaches to open banking in terms of the type of regime and the level of standardization. They require, facilitate or allow banks to share customer-permissioned data with third parties, by adopting open-banking frameworks. Broadly, three variants can be distinguished (see image), ranging from fully initiated by the market to fully enforced by the regulator. Although countries start from different frameworks, they are learning from others and are beginning to converge towards each other. Early implementations for instance, reveal the importance of standard setting regarding APIs, data formats and customer experience. Implementing standards proves the best route to achieve industry-wide interoperability: it will drive cost-reductions in the industry, make better use of scarce developer resources, and will allow banks and third parties to focus on delivering great end-user propositions.