The fintech sector has been extremely successful (and extremely profitable) for most of the last decade and much more during the epidemic. But it may come as a surprise to learn that while many in the industry believe the story has begun and the sector is poised to achieve much more, the next decade of fintech is expected to be quite different from the last 10 years. Long before the epidemic, the way banks were regulated changed. Initiatives such as Open Banking and the Revised Payment Services Directive (PSD2) were proposed as a way to promote competition in the banking industry – allowing small challenging companies to enter a market that has long been under corporate headlines.
Now though these initiatives are in place, we see that their impact goes beyond opening a gap for challenging banks. As Open Banking Needs Banks to provide valuable data through APIs, it is revolutionizing the way small and medium-sized enterprises (SMEs) are financed – including data and not hard capital the most important thing driving fintech success. Understanding the importance of open banking is important to understand the changes in fintech cleaning and the way the industry works with small businesses.
This is an idea that has really caught on between government and supervisory banking regulators over the past decade and we are now beginning to see its impact across the banking sector. At its most basic level, open banking refers to the process of using APIs to open the financial data of customers to third parties. It allows these third parties to design, build and distribute their own financial products. The utility (and ultimately profitability) of these products does not depend on retaining a large amount of their capital – it is the data they collect and their value in it.
Open-banking models pose a number of challenges. One is that the banking industry needs to develop much more rigorous systems to constantly seek consumer consent to share data in this way. Although the early years of FinTech have taught us that customers are more comfortable presenting their information – some studies indicate that Fintech prefers about 60% of American privacy – the type and amount shared through the open-banking framework is much higher than we have so far. More extensive than the products I have seen.
