Open banking: A move towards greater or lesser transparency in banking?
Open banking is increasingly being cited by commentators as an exciting fintech trend to watch over the coming years.
Will it reduce or increase information asymmetry between consumers and finserv companies?
The movement is being largely driven by important governmental interventions in a number of key jurisdictions. For example, the adoption of this concept has strong links to the publication of two related, although distinct, pieces of regulation: The ‘Open Banking Remedy’ as published by the Competition and Market Authority (CMA) in the UK, and the second European Payment Services Directive (PSD2) as published in the Official Journal of the European Union.
PSD2, in particular, is set to have a significant impact on the payments sector in the EU, covering all payments accounts, including easy access savings accounts and credit cards that are accessible online or over mobile.
The PSD2 legislation is seeing a shift in the EU towards new forms of banking services offered by third-party providers that are now allowed consumer-permissioned access to previously inaccessible consumer financial data. Payment Initiation Service Providers (PISPs) promise optimised and automated payments processing that leverage the ability to analyse large volumes of personal financial data, while Account Information Service Providers (AISPs) provide novel aggregation services that allow consumers to manage multiple bank accounts with multiple providers in an easy streamlined manner.
Some financial institutions see PSD2 as an opportunity to work closer with emerging fintech companies. Others see it as a threat to their business. This has led to different strategic choices for banking leaders. Four generic strategic options have been identified, where incumbent banks can merely comply with the minimum level required, compete aggressively with fintech competitors, expand their product and services offerings through collaboration with fintech companies, or completely transform their existing business models to this changing ecosystem. Making the ‘right’ strategic decision will require banking executives to (re-)consider their future ambition, desired position in the value chain, the accompanying transaction portfolio, and impact on the operating model.
The open banking movement is a vision beyond just payments of course, with the goal being to disrupt the full range of bank products and services to the benefit of consumers. Several challenges exist for open banking: the willingness of consumers to trust multiple companies with their personal financial data; the ability of third-party providers and, indeed, incumbent banks to truly offer an enhanced customer journey in their financial dealings; the technological innovations required to effectively manage and ensure data security and privacy; and clarity over ownership rights in this process of commodifying personal financial data.
These have received considerable attention in the general discourse around open banking. One area that has received much less attention, however, is that of whether open banking will lead to a more transparent banking system or not. An open question exists around whether open banking will reduce or increase information asymmetry between consumers and financial services companies.
At the individual bank level, relationship banking (coupled with customer inertia to engage with multiple banks) has been central to the mitigation of the bank’s exposure from this imbalance in information and to avoid as much as possible poor and costly decisions to extend banking products and services to problematic customers. The relationship banking model may break down to some degree under the open banking model as full range (i.e. beyond payments) AISP type services will allow a customer to easily interact with multiple financial services providers, each of which will have only a partial view of the customer’s banking behaviour. Credit information services in the current banking system play a role in reducing information symmetry at the bank sector level, but how such services will need to change in a full open banking ecosystem needs to be considered.
Indeed, academic theory suggests a link between information asymmetry and the structure of the banking sector, and this dynamic in an open banking environment warrants further consideration. On the flip side, of course, open banking may reduce information symmetry through better processing and analysis of raw personal financial data, and customer willingness to permission access to this enriched financial data to benefit from cost effective and tailored financial solutions.
Open banking is an exciting vision for the future of banking globally, which present some fascinating questions that will keep industry and academia engaged for years to come!
By Mark Cummins, Professor of Finance at the Dublin City University Business School
