What are the strengths, weaknesses and concerns around open banking?
I think it’s time to take stock of open banking.
Like most areas of fintech, with open banking, there is a key focus on how to bridge the gap between the promise of the technology and the commercial reality of running a business.
As such, there is a lot of focus on how banks and fintechs are approaching open banking in terms of their business models and, by extension, how they are intending to generate a sustainable margin of profit from the technology.
At Omdia, we’ve done a lot of work examining participants in the sector that are finding use cases that offer a compelling revenue model.
How are banks preparing for the open banking revolution?
In Omdia’s tracking data for financial services and banking technology, we are closely following the development of open banking around the world.
Our Banking Software Contracts Analytics Tracker shows open banking was the third most popular area of focus among core banking deals tracked between 2021 and 2023, with a total of 109 deals. This reflects the growing importance of core banking system upgrades among banks in facilitating open banking-like services.
Number of core banking software deals by sub-system area, 2021–23. Source: Omdia.
Our Banking Software Contracts Analytics Tracker also shows that the most contract deal activity in this area is coming from smaller banks, with legacy and major institutions making fewer commitments of capital in the area.
One could infer from this that smaller banks feel that open banking offers a route to rapid scaling in an era when capital-intensive growth tactics are no longer available.
The strengths: an evolving infrastructure
As noted in Omdia’s Market Landscape: Open Banking report, over the years, open banking has evolved alongside modern infrastructure, with a growing number of fintech companies attempting to offer a full range of banking services.
One such example is OpenPayd, a Banking-as-a-Service (BaaS) platform, which offers a range of banking and payment services to both financial and non-financial institutions, allowing them to embed financial services through a single API. The services are supported by a global network of licenses covering IBAN, open banking, electronic money accounts, FX conversion, international payments, card processing, and debit cards.
Others, like Nuapay (recently acquired by GoCardless), act as outsourcing partners for banks, payment service providers, and corporations. Their services can be integrated with popular software packages to support account-to-account (A2A) payments utilising open banking.
Meanwhile, some companies are focusing on serving the needs of specific market niches. For example, Prommt’s payments platform offers a solution that accepts both card and open banking payments, which is integrated with major payment gateways and enterprise systems in the hospitality, automotive, and luxury retail sectors.
All of these are examples of innovative use cases that are emerging where the value of open banking makes sense. The focus then needs to be on raising consumer awareness, boosting the consistency of experience, and improving conversion rates.
The weaknesses: user experience
Although new and innovative payment options have emerged utilising open banking as an alternative to traditional payments such as card, cash, and ACH, adoption has been slower than anticipated.
This is in part due to an inconsistent and unreliable user experience with open banking payments that does not incentivise consumers to change behaviour, suggesting urgent investment is required to enhance the customer experience.
A recent APImetrics report on UK open banking API performance in 2022–23 found there was a 6x difference in total latency between the fastest and slowest banks, which is a big barrier to the universal adoption of open banking payments.
As the digital economy becomes increasingly prevalent, digital identity is an area that will continue to gain increased attention in the context of open banking and, subsequently, open data, enabling product pathways to move much closer to being seamless.
This will require a much broader range of data than open banking can provide, and it will be interesting to see the practicalities of how open banking data can be combined with other forms of data, particularly as consumers in the UK have both the facility to request what data an organisation holds on them as well as the right to be ‘forgotten’, in terms of data deletion.
These are interesting practical and organisational issues for the future of the open data economy, and there is as much risk as there is opportunity.
The concerns: consumer perception
Although the regulatory framework is evolving to address some of the challenges around standards and security, consumer perception of open banking remains at low levels.
Some consumers may be wary of allowing their financial data to be accessed by third parties due to concerns about privacy and security. And with increased data sharing, there are also growing fears about cyber threats.
With any technology, consumer confidence is absolutely key in determining adoption, and any potential missteps can result in a perfectly good technical solution becoming commercially unviable. Unless and until there is standardisation, the mismatch between systems will create both opportunities and challenges in the open banking landscape.
The open banking industry has been searching for a way to drive adoption so that they can take open banking from a growing but still niche part of the finance industry and demonstrate traction to investors.
There are all kinds of good use cases that are emerging, and they need to be in the vanguard of technological rollouts. The industry must look beyond the pure technical capabilities and ensure that the technology is serving the strategic needs of consumers as well as institutions.
About the author
Ouliana Smith is a senior research analyst in Omdia’s Enterprise IT Financial Services Technology team and has 10 years’ experience in financial services. Since joining Omdia in 2022, she has focused on digital transformation in retail banking and fraud solutions with a strong interest in alternative payments.
Ouliana started her career as an associate analyst with Datamonitor, now GlobalData, a global market intelligence provider, where she specialised in cards and payments before later moving into wealth management.
Ouliana holds a first-class honours degree in mathematics from Coventry University and an upper-second-class honours degree in art history from the Open University.
