Open banking represents a significant shift in the financial services industry. Previously, traditional banks held a monopoly over consumer data. With open banking, they share this data with licensed third-party providers, with explicit consumer consent. Banks share data through Application Programming Interfaces (API), which act as a software bridge.
With the enforcement of open banking in Europe in 2018, there was a surge of innovation within the fintech space. Here, we take a look at the benefits of open banking vs traditional banking.
Open Banking vs Traditional Banking
In essence, while traditional banking provides a stable foundation for financial services. Meanwhile,open banking emerges a dynamic, technology-driven approach. There are many differences between open and traditional banking. Let’s take a look at them in more detail to understand where open banking exceed legacy institutions.
Financial Inclusion
Open Banking enhances financial inclusion by leveraging technology to reach underserved or unbanked populations, offering them access to financial services. Meanwhile, traditional banking has historically struggled to extend services to less accessible areas.
Accessibility and Convenience
Traditional banking often relies on physical branches for service delivery. Open banking provides improved accessibility and convenience, enabling customers to access services remotely, often via mobile devices.
Lower Costs and Fees
Open banking promotes lower costs and fees due to increased efficiency within the ecosystem. Higher fees and costs may be imposed by traditional banking services due to the overhead of maintaining physical branches.
Personalisation
Alll the data that’s shared across developers in open banking allows the creation of highly personalised products. This is a massive benefit for consumers. For example, open banking allowed the development of state-of-the-art budgeting apps.
Customer Experience
Open banking offers an enhanced customer experience by providing a range of services through a single interface, simplifying interactions. In traditional banking, on the other hand, customers may face a fragmented service experience, needing to interact with multiple entities for different services.
Innovation
Third-party providers have more data and flexibility to develop new tools in open banking, which fosters innovation. Meanwhile, in traditional banking innovation is often slower. The legacy systems and corporate structures may constrain the development of new products.
Regulatory Environment
Open banking operates within an evolving regulatory framework. In Europe, the new directive PSD3 will be finalised in 2024. Adapting to new regulations may require additional efforts from providers. Traditional banking, on the other hand, functions under established regulatory frameworks.
From Open Banking to Open Finance
Consumer interest open banking is expected to surge in the next decade. According to Juniper Research, the total value of open banking transactions will increase from $57bn in 2023 to an impressive $330bn by 2027 —a staggering growth rate of 479%.
Open finance is an emerging term in the industry. It’s the next step of open banking, which would require all financial institutions to share customer data with licensed fintech companies.Open finance, while still in progress, is poised to foster a more competitive environment and personalised products.
For consumers, this means a better overview and management of their finances, as open finance offers insights across a broader spectrum of their financial life. Open finance can significantly improve financial planning and decision-making for consumers by providing more detailed and personalised information.
For businesses, it means more untapped opportunities and less reliance on legacy systems. Traditional banks would need to seriously adapt in this future.
