For about 100 years, the banking landscape has remained largely unchanged. Go back to 1923, and you’d see a lot of the same names and systems that are around today. Even in the age of the Internet, traditional institutions have been slow to hop on the digital bandwagon.
But now, in 2023, we’re in the midst of a quiet revolution – namely, the wide scale adoption of open banking. Many traditional financial institutions are taking note.
“Open banking is a trend that is taking hold globally,” says Visa. According to the credit card giant, it’ll have a positive impact both for average people and the financial services industry “thanks to a better consumer experience, keener competition, and increased innovation.”
But before we jump more into the promise of open banking – and why companies and consumers should be excited about it – we need to answer a question that might be on your mind…
Just What is Open Banking?
The best way to explain open banking is by looking at the ethos behind it.
Open banking is based on the common sense concept that financial data is owned by you, whether that’s your personal transaction history or your company’s current cash position. Though banks may be holding your money, data related to it should not be their exclusive domain – rather, you should have the ability to use the information to your advantage.
This simple idea has led to the development of an industry of open banking, fintech innovators who are shaking up the financial landscape. Sometimes these companies compete with banks, but other times they partner with them. With your explicit consent – and under the strictest security and privacy measures – you can grant these third parties access to financial data that would otherwise be held solely by banks.
Digital communication between these third parties and banks, by the way, is facilitated by APIs – application programming interfaces. For this reason, you might also see open banking referred to as API banking.
Open banking can provide heaps of benefits – every fintech provides a different service. Consumers, for example, might get access to customized loan offers or solid advice on how to better manage their finances.
For companies, open banking often means automation of processes like cash flow analysis or account reconciliation. Account aggregation is another huge benefit – there’s no need to log into many different bank portals in order to collect data. With a platform like Trovata, you can view everything from one, central location – a single source of truth.
Open banking is especially relevant in light of recent incidents like the SVB collapse – users (understandably) want more transparency. Open banking provides this, along with the ability to transfer financial history from one institution to another seamlessly.
“Moving past legacy transaction banking systems that were designed before APIs brings the promise of a new banking infrastructure within reach.”– Goldman Sachs
The Story and Effects of Open Banking
The history of open banking can be traced back to 1980, when the German post office ran a test allowing 2,000 private individuals to make transactions through their phone lines.
But it was really Europe’s PSD2 – a wide-ranging piece of legislation – that launched open banking in its current form. The UK, especially, ran with the changes brought about by PSD2.
Today, the UK has more than 7 million active users of open banking services, including about half of all small businesses. In 2022, over 68 million open banking payments were made, a large increase from 25 million in 2021.
So what are the effects?
According to Open Banking Limited, 77% of small business owners with access to open-banking-backed services have “more immediate and accurate insights into their financial position at any given time.”
Over time, small businesses stand to gain £6 billion through utilizing open banking technology, per one report. Consumers, on the other hand, are estimated to gain £12 billion. The UK government also projects that open banking could add £27.8 billion to the country’s GDP.
Of course, it’s not only consumers and companies that benefit – according to Accenture, banks that utilize open banking APIs see a 20% increase in revenue.
Below, we’ll take a look at some of the practical applications of open banking for firms.
Benefits of Open Banking for Companies
Better Access to Information
Data silos are a huge problem for companies. When each department records transactions in their own spreadsheets, it’s difficult to determine which record is most current. This can result not only in plenty of time wasted on reconciliation, but even flawed decision-making that could cost the company money.
Open banking software allows you to view everything in one platform so that there’s a single source of truth. Decision-makers can act from this information, knowing it’s been recorded automatically and is therefore accurate, and reporting becomes clear and precise (not to mention, much simpler).
More Streamlined Payment Approvals
When it comes to business-related payments, large companies typically have standard approval flows in place. Frontline, brick-and-mortar managers, for instance, might be able to approve anything under $25,000. Anything over $25,000 but under $125,000, the treasury has to approve – go much higher than this amount, and the CFO or even the CEO has to get involved.
But this can get very complicated, as there may be a plethora of different banks and ERP systems, each with its own approval processes. Wouldn’t it be great if – instead of having to tweak things independently for Wells Fargo and Bank of America – all these approvals could be set from one, centralized location?
We thought so, and that’s exactly why you can manage approvals within Trovata. Decision-makers can act quickly in the best interest of the company.
It’s been a long time since any new payment rails have been introduced in the United States. Wire transfers date (literally) back to the time of the Wild West, while ACH first came out in the 1970s.
Certainly, the way we do payments has changed quite a bit since the 1970s. Nobody wants to wait a day or two to receive payments – thanks to applications like PayPal or Venmo, people expect to have access to funds instantly.
Thankfully, the Clearing House recognized these changing expectations and introduced real-time payments (RTP) in 2017. Unlike wire transfers and ACH, which can take a day or two to process, real-time payments are delivered instantly. They’re also significantly cheaper than wire transfers.
The switch to open banking, which enables API payment processing, is one of the primary drivers for adopting real-time payments. With real-time payments, funds are available immediately, helping businesses better manage their cash flow and reducing the risk that comes with older methods.
Send Payments in Bulk Instead of Batch
Speaking of older methods – open banking is not only facilitating access to new payment types, but also improving older payment rails like ACH. For example, every treasurer knows about batch payments – this is where you consolidate a large amount of payments into a single file. Batch payments are useful for standard business operations like payroll or subscription payments.
But, while ACH has been mostly reliable for processing batch payments, the system does have a few drawbacks.
First, if one payment gets denied, it’s possible the entire file fails to be processed. Treasurers then have to spend hours on reconciliation, finding that one error and fixing it before attempting to send the file again. Second, you actually have to pay a small fee for each individual payment. If there are many, many payments – as is often the case, as that’s the whole point of batch payments – this can quickly add up.
With open banking, you get access to a new system known as bulk payments, which solves both problems. For one, it doesn’t incur any fees at all because each payment is made individually.
Second, because each payment is made individually, it’s easy to see which was denied should the file not get through. Even though payments are made individually, it’s still one file and one line item in reporting – in other words, with bulk payments you get all the benefits of batch payments without any of the drawbacks.
Faster Decision Making
Open banking is called open banking because it mandates or encourages banks to be transparent. But this isn’t the only way open banking is transparent – it’s also transparent in that stakeholders can access critical information like cash position across currencies and accounts in near real-time, helping them make informed decisions on a dime. Emergency situations like March 2020 – the beginning of the pandemic – come to mind.
What’s Next For Open Banking?
The future of open banking is exciting. According to Accenture, 76% of banks at the end of 2021 expected API use to increase by 50% over the following 3-5 years.
While open banking is already common in the UK, EU, and Australia, the world’s largest market, China, has recently begun to take steps in that direction. For instance, the People’s Bank of China has guidelines to promote using APIs for data sharing and integration. In contrast to the UK and Europe, open banking in China is not being driven by legislation but rather ground-up, fintech innovation.
What about the US?
Well, the US has indeed been slower to make the shift to open banking. But this isn’t going to be like the botched switch over to the metric system – in October 2022, the Consumer Financial Protection Bureau (CFPB) introduced an open banking rule that required financial institutions to share user data upon request.
The rule will unleash “more market competition,” says CFPB director Rohit Chopra, providing “big advantages to those who provide the best products, service quality, and rates.”
In 2022, the global open banking market was valued at $20.07 billion. According to Grand View Research, this value is expected to grow at a Compound Annual Growth Rate (CAGR) of 27.2% in the time between 2023 and 2030. With both the United States and China taking steps towards open banking, and consumers and companies becoming more aware of its benefits, it’s no wonder why.
What’s Next For You?
At Trovata, we know open banking will be a critical piece of the future financial landscape and are proud to be at the forefront of this developing innovation.
And what about those working in the treasury department? By introducing open banking to your workplace, you benefit from automated processes that lead to transparent, actionable intelligence. You save time and money and help transform the treasury department from “just” an accounting center to a division that actively drives company policy with rich insights made possible through APIs.
To learn more about how open banking APIs are revolutionizing payments, check out this episode of the Fintech Corner podcast.