Revolutionizing Financial Services: The Rise of Open Banking

Open banking-related payments and services are becoming a global trend in the banking industry, driving innovation and competition and leading to a more dynamic financial services landscape.

In May 2024, Stripe launched its first open banking-powered payment method in the U.K. This low-cost, real-time payment method allows consumers to pay directly from their bank accounts.

What Is Open Banking?

Open Banking is a financial service model where users are given control over their financial data, allowing them to share it with accredited third-party entities to avail enhanced financial services and products. Users must give explicit consent to share their data with accredited third-party entities they choose to share their data with.

The origin of modern open banking can be traced back to 2007, when the European Commission devised the first Payment Services Directive (PSD1). Its objectives were to stimulate competition in the financial industry, enhance the quality of services provided, and protect the end user.

In 2018, PSD2 replaced PSD1, building on its foundation with significant implications for banks. PSD2 mandated that banks provide API access to authorized third parties, aiming to create a more integrated and efficient European payments market while ensuring a level playing field for payment service providers. This paved the way for open banking regulations globally.

Types of Adoption

Open Banking is regulated and mandated in several countries. For example, the U.K. (follows PSD2), Australia (part of CRD legislation), European Union (PSD2), Brazil. UAE and Canada are also in the process of regulating and mandating open banking implementations.

If Open Banking is mandated, the reciprocity principle applies, meaning that if you are going to use data from the system, you must also share your data with the system.

Regulated but not mandated (Voluntary participation and regulators encourage more participation). For example, in Singapore, Japan, South Korea and India, policy makers are introducing a range of measures to promote and accelerate the take-up of data sharing frameworks in banking. Market demand is also pushing implementations. The latest data from South Korea shows that the country is well ahead of its European counterparts in terms of payments market adoption

In countries like the U.S., open banking is unregulated, but adoption is high due to market needs. Large banks in the U.S., aware of the implications of open banking, have proactively implemented open banking based on global standards by entering into data sharing agreements with API standardization programs.

The U.S. is moving towards regulated open banking, with the Consumer Financial Protection Bureau (CFPB) gearing up to formally introduce a rule on personal financial data rights that was first floated in October 2023.

Future of Open Banking

Open banking will be regulated worldwide and more widely adopted by the banking industry, either because of new laws or market demand. For example, Stripe has introduced a new payment method using open banking, and we can expect more new and competitive products like this. Open banking encourages collaboration between FinTech companies and traditional banks, allowing FinTechs to offer new services by working with existing financial systems. Open banking is a key global trend in financial services and will keep driving innovation for years to come.