Last editedMay 20239 min read
Open banking allows consumers to share their banking data with third-party financial providers via application programming interfaces (APIs). Open banking offers consumers more control over their financial data, making it easier to manage, move and leverage personal funds.
For regulated providers, Open banking data enables financial products to be matched with consumers, making it easier to offer the right products to the right people and make decisions on credit advances.
How does open banking work?
The structure behind open banking is complex, relying on the use of regulated APIs developed by the banks to comply with the most recent set of legislations, such as PSD2. These APIs establish a connection between third-party providers and users' bank accounts, allowing financial data sharing.
Once users consent to a third-party accessing their information, they can enjoy the benefits of the many platforms developed to take advantage of open banking.
Open banking payment initiation
Registered providers, known as Payment Initiation Service Providers (PISPs), are licensed to process payments within the open banking ecosystem. With specific consent from users, PISPs can initiate payments directly from customer's bank accounts, allowing for a frictionless user experience when buying products and services online.
Open banking has kickstarted a revolution inside the financial markets and open banking use cases are only limited by one's imagination. Once held exclusively by banks, personal financial data is now available for startups and developers to create new financial services and tools. As a new development, open banking use cases are still evolving, with the initial wave of products focused on the lending and credit markets. However, we now see more open banking use cases in markets like personal finance, payment methods, and insurance.
As the implementation of open banking platforms progress, use cases will continue to develop in new and existing markets. Below, we discuss sectors where open banking is already operating or where there are clear opportunities to do so.
Personal finance just got easier
For decades, customers could only manage their finances via bank branches through direct interaction with a bank employee. Slowly, over the past 20 years or so, customers' needs have drastically changed. Now, we can manage every aspect of our bank accounts virtually online.
Personal finance needs include:
advice and guidance in budgeting
access 24/7 to individual bank accounts
improved savings tools
simplified investment options
consolidated view of income, expenses, loans, and investments
With the rise of online banking, customers developed new personal finance habits and needs that banks could not satisfy. This vacuum has been filled by a new breed of personal finance apps that have rapidly grown in popularity. Today, there are dozens (if not hundreds) of apps for personal finance that bring a vast portfolio of tools to their users' fingertips.
6 apps for personal finance you might want to consider
Emma - Money Manager & Budget Planner Tracker (Android | iOS)
Spendee - Budget and Expense Tracker & Planner (Android | iOS)
The evolution and growth of personal finance apps show that as open banking features are added, customers can perform more complex financial activities from their smartphones.
Consumer lending becoming more accessible
The consumer lending market has undergone a similar evolution in the last few decades. Customer needs have changed as technology has developed - from needing to book a meeting at their bank branch to accessing personal loan offers directly on their online banking platforms.
This shift has brought incredible benefits to customers, eliminating the hassle of waiting in queues at the bank and simplifying the traditional loan processes. With the adoption of open banking, these processes have become even more simplified and accessible to everyone.
Before open banking, consumer lending customers were required to undergo a long and complex process analysing their credit history. In two specific situations, credit history was the main reason customers would be declined a loan:
Bad credit history — even if an unfortunate event, such as a missed credit payment, happened 20 years ago, the current credit score is still affected.
Absence of credit history — it's difficult for younger people who haven't had a chance to build their credit score to pass a credit check.
Open banking lenders no longer need to rely on credit history when considering applications, giving everyone a fairer chance of being accepted for a loan. By providing instant access to a customer's financial data, consumer lending companies that adopted open banking can automatically acquire and analyse data. Then, with advanced categorisation and analysis tools, they provide an answer to a loan application in just a few minutes.
There are several benefits gained from applying these new methods to consumer lending. Approval rates increase substantially, admin costs are reduced, and customers have a better chance of having loans approved.
Business lending and open banking
The business lending sector was forced to change operating practices and procedures as a result of the pandemic, from traditional face-to-face meetings to an immediate need to digitalise the entire business lending market. Open banking allows business lending providers to take advantage of automated bank statement collection and easily understand the financial health of a business.
Buy now, pay later is a new purchasing option
BNPL is a financing arrangement that allows customers to make purchases without the need to pay the product's full price all at once. Customers are offered options that split the cost into several instalments, often interest-free. From the merchant’s perspective, BNPL helps sell more products by providing customers with short-term, interest-free purchase options.
With the integration of open banking on BNPL, providers can further improve their approval rates and provide a better assessment of their customers without the need to connect with traditional credit bureaus. The promise of quick analysis of current financial data means that every assessment considers the current financial habits and circumstances of the customer.
The growth in popularity of BNPL has become apparent over the past few years, with a significant increase in the number of online shops offering buy now, pay later.
GoCardless offers Instant Bank Pay
Instant Bank Pay is a payment method that allows customers to make online purchases using their bank account rather than a credit or debit card. With Instant Bank Pay, the customer is redirected to their online banking website, where they can securely enter their login credentials and complete the transaction. As well as being convenient, it is also a secure way to make online payments, as the customer's bank account information is not shared with the merchant.
In addition to convenience and security, there are further advantages for businesses offering Instant Bank Pay as a payment option:
Lower transaction fees: Credit and debit card transactions often come with higher fees for merchants compared to bank account payments. By offering Instant Bank Pay, businesses can potentially save money on transaction fees.
Increased sales: By offering a range of payment options, businesses can make it easier for customers to complete a purchase, which can lead to increased sales.
Improved customer loyalty: Offering a convenient and secure payment option can help to improve customer satisfaction and loyalty, as customers will appreciate the convenience and security of making payments using their bank account.
First-time buyer saving app Nude found that once they switched to collecting via Instant Bank Pay with GoCardless, customer contributions increased by 25%. CEO and founder Crawford Taylor said:
Watch the video
Collect customer payments in seconds with Instant Bank Pay via GoCardless. It's simple to set up, has low transaction fees & is easy for customers.
Mortgage lending and Real Estate
As one of the financial sectors with the slowest rate of digitisation, the mortgage lending market has taken its time over adopting open banking.
Changing habits following the pandemic have seen customers interact with financial institutions in drastically different ways, with online presence becoming the main factor in choosing a mortgage lending provider. Moreover, with the rise of fintech companies, traditional banks are no longer the only option for mortgage seekers. This newly arrived competition has forced positive changes.
The housing industry faced a similar situation, even though the sector has seen a considerably higher level of new technologies introduced over the past few years, especially with the introduction of a virtual real estate market. With the adoption of open banking, both markets can significantly improve the level of service, efficiency and reliability.
What does open banking bring to mortgage lending and real estate industries?
reduce the number of steps needed to apply for a mortgage
automate matches between lenders and loan applicants
allow tenants to prove creditworthiness to landlords
fills information gaps when credit bureau data is not available
Open banking helped to widen the criteria for mortgage lending since lenders are no longer restricted to only credit bureau data to evaluate applications. Moreover, with the improved efficiency and reduction in costs due to automation, it became possible to offer better mortgage lending rates by taking into consideration the specific situation of each customer.
Real estate investment opportunities have also surged thanks to open banking, propelled by easy access to current and accurate financial data. Every real estate agency that has adopted open banking has been able to reap the benefits of higher approval rates and better matches between potential buyers and properties.
Payments are adopting new technologies at a fast pace
The historic traditionality of the banking industry may create a little friction in the adoption of new technologies. However, with the arrival of mobile banking, digital, and contactless payments, the industry has become accustomed to embracing new payment methods.
As in many sectors, the pandemic has served as an enormous push toward the adoption of digitalisation and the use of new payment technologies, especially where in-person payment is concerned. Currently, it's possible to take advantage of NFC and RFID to make payments with contactless cards, smartphones, and even smartwatches.
With the rise of online shopping, millions of people rely on their smartphones every day to purchase products and services online, and this inevitably led the big tech companies to push their own payment platforms. As a result, it is possible to make payments with Google, Samsung and Apple. On the other end of the spectrum, there are companies like Stripe and GoCardless that make it easier for businesses to accept online payments.
Telecoms offer customers better packages via open banking
The pandemic meant millions of people were forced to work or study from home, offering telecom companies an excellent opportunity to expand their offers, technologies and customer base. Now telecom companies are much more than simple service providers, with most having their own financing products utilising open banking to offer credit to customers more efficiently and safely.
Since there is no longer a need to rely exclusively on data provided by credit bureaus, Telecoms can make a more precise assessment of customers' current financial situation, with customers no longer concerned with building a credit score before being able to afford new consumer electronics.
Debt collection is easier with new tools
Like traditional banking or credit check methods, debt collectors found it was becoming harder to track and assess debt collection situations using traditional, mostly manual, methods. Furthermore, the pandemic resulted in a spike in unemployment, creating a new type of debtor highly motivated to resolve debt issues while protecting their credit rating.
To cope with their new reality, debt collection agents have embraced open banking, which provided them with new tools allowing them to answer the needs of the current situation. Now, debt collection agencies have access to more accurate and updated information regarding customers' financial situations, which aids in understanding income stability, active loan payments, and other important data.
Insurance companies can offer tailor-made packages
For the longest time, obtaining insurance was a tedious, complicated and costly process, preventing many people from purchasing. The insurance industry has undergone significant evolution during the past decade, following the same digitalisation process that other financial markets have been through.
As a result, it's much easier to find, apply for, and obtain insurance online. More recently, with the arrival of open banking, players in this market can take advantage of new financial data tools.
There are multiple insurance quote comparison platforms online that help customers to find the perfect match for their needs. Now, with the implementation of open banking on these platforms, more accurate financial assessments can be made of individuals. Moreover, insurance companies can also take advantage of open banking for identity and bank account verification, assuring customer safety at all times.
iGaming made fair and safer for everyone
iGaming has been one of the industries with the highest growth rate in recent years. In Europe, the industry has reached multi-million euro revenues, but with millions of active users every day, everything is not perfect. As the market grows, the problems and difficulties of fraud and security challenges in delivering a frictionless experience for users are constantly growing.
The trend in iGaming is clearly to adopt as many new technologies as possible to increase the level of experience for users. Especially with the arrival of the pandemic, it became more important than ever to give users a real-life experience while gaming online. For that, many platforms have adopted Virtual Reality and Artificial Intelligence technologies.
Similarly, the adoption and implementation of open banking are crucial to help the iGaming industry fight fraud through direct access to account data and transaction history. Moreover, some features enabled by this new technology allow for seamless and secure account top-ups and instant payouts, bringing further innovation for users.
Crypto needs smooth and secure connections between wallets and bank accounts
With all the ups and downs aside, the cryptocurrency world continues to grow at an incredible pace, with new technologies being created every day. Whether crypto is indeed ‘the future‘, as some suggest, the sheer number of different projects born thanks to blockchain technology is notable.
One of the challenges in the crypto market is how platforms can deliver customers a smooth and fast user experience that is also highly secure when buying, selling and trading assets. Open banking can provide a solution, allowing for a frictionless customer experience when trading funds, as well as faster identity verification.
Investment platforms can now guarantee a better user experience
An investment platform is an online service that allows users to buy, sell and hold a great variety of assets. Depending on the platform chosen, it is possible to invest in the stock market, crypto, fiat money, and others.
Like almost every other financial sector, investment platforms have gone through a significant evolution over the past few years. In a short period of time, investment platforms went from being exclusive to ‘experts’ and limited to the stock exchange to being available to virtually everyone and expanding their reach to all kinds of markets.
Demand for investment platforms has seen continued growth resulting in a great variety of companies offering investment services. With so many options, when it's time for consumers to pick the best investment platform, it will depend on personal goals and requirements. This move towards more individually-tailored financial products is one of the main benefits of the introduction of open banking.
GoCardless and open banking
GoCardless offers Instant Bank Pay powered by open banking, allowing businesses to collect instant payments from customers in a convenient, fast and secure way. Instant Bank Pay is more reliable, secure and affordable than collecting card payments and can be paired with Direct debit to allow initial instant payments whilst the recurring payment mandate is created.
Instant Bank Pay payments are confirmed instantly, which means better visibility for you and your customers, less time spent chasing one-off payments, and a smoother customer experience.