Have you done much financial planning? Do you have clear goals for your financial future? Or has this taken a backseat on your priority list? We’ve extensively discussed digital banking in terms of growth, functionality, and the overall economics of the FinTech industry. Seldom have we talked about the untapped potential that could dictate major growth and the concerns that make it “untapped”. Here we’re going to focus on an interesting concept known as “open banking” which could not only innovate the FinTech industry but the financial sector as we know it.

Since digital banking was first introduced to the public in 2018, its trajectory in use has risen exponentially. There are many reasons behind this growth and one of the big ones we’ve seen in parts of the world is the use of open banking platforms. This technology has been a dominant force for FinTech companies in Europe who, in 2020 alone, collected around 12.2 million users. By 2024 that number is expected to jump up to over 132 million. The numbers are impressive and the concept is not exclusive. Recently, Canada and the United States have speculated that the countries could soon join the wave and roll out their open banking platforms. However, many aspects need to be sorted out before this can happen.

The main draw of open banking is that it provides a database for companies to understand the needs of their consumers and have easy access to that information with APIs (Application Programming Interfaces). What this means is that the software can access customer data and then make unique offers to users surrounding financial advice and planning. Of course, this raises security concerns, but the adoption is gradual. In the UK for example (where open banking is incredibly prevalent), FinTech companies are only allowed to use open banking platforms if authorized by the Financial Conduct Authority (FCA).

Consumers who work with FCA-approved institutions are then able to compare interest rates, fees, and the financial management features of different products. Consumers can find a service that’s a good fit and companies can retain them. The point we’re getting at here is that without the regulation of open banking APIs, the future for FinTech platforms doesn’t include tailored service. However, it is best for this technology to take its time to develop since these platforms are the mediator between third parties and banking institutions where security assurance is non-negotiable.

The goal in North America is to be able to have a regulator authority like that of the FCA which would be an exciting advancement in personal finance. However, it’s not there at the moment so for now let’s examine the state of open banking platforms in the US and Canada:

The United States

The United States is no stranger when it comes to FinTech. In fact in 2019, American FinTech businesses reached nearly $60 billion in investments. This is without any full-featured open banking platforms. As of 2022 in the US, the closest technology to an open banking concept is known as “Screen Scraping”. Essentially, it functions as a way for third parties to access banking information with their users' permission and use that to deliver offers. It is similar in theory to open banking but nowhere near as advanced or secure for that matter.

This has proved to be useful for users but banks became frustrated with the third-party access which led to the creation of the Financial Data Exchange (FDX). Born out of conflict regarding screen scraping between third parties and banking institutions, this consortium was made to develop guidelines for accessing consumer data. This is still a work in progress for the most part but it will provide solutions to create a dominant technology down the line. Screen scraping is not a long-term solution which is where the FDX is expected to step up and sort out an alternative. The organization now has around 32 million consumers who rely on the exchange’s API to fuel their open finance.

Canada

There is no form of secure open banking in Canada as the government is still researching the safest implementation route for the country. During this review, the key concerns are based on the security of databases and customer privacy. Cyber attacks are a major concern for financial institutions (let alone those that work with third parties) as they not only threaten businesses in exchange for ransom but they could leak confidential information.

In Canada alone, 85.7% of organizations had been hit by a cyber attack in 2021. 61.2% of those organizations were targeted with ransomware. Ransomware is a form of threat that locks up whatever information is necessary to get the victim to pay for its release. These statistics are extremely worrisome and they’ve been a big contributor to the country's skepticism around open banking which could be a big target. Now, this certainly has not deterred the country away from FinTech which in 2019 had grossed over $776 million in revenue for the Canadian sector. The following year, businesses saw investments reaching a total of over $6 billion.

Overview

It is clear that Canada and the United States are thriving with FinTech. What open banking platforms would do for businesses in these countries is unforeseeable. When we look at countries that have embraced the platforms like the United Kingdom and Brazil, it’s seemingly all green lights. These places have created an environment for institutions to compete with each other and drive people toward the automation route. However, it is still not the dominant choice; a rough estimate states around 7% of Europeans use open banking. Would this be the same case in North America? Likely not as the continent is far more interested in technology than Europe, but nothing can be said for sure. It is still too new of a concept to pinpoint exact statistics so we can only base this on the trends we’re seeing. Specifically, the investments into FinTech companies in Canada and the United States sit at over $65 billion.

How Would Open Banking Benefit North America?

In North America, consumer culture is constantly moving towards automation and simplicity. This same concept is heavily relevant in finance (which people want access to from anywhere). Since everyone wants to feel ahead of the game and give their money to result-oriented advisors at low costs, open banking makes sense. Is this a lot to swallow? Most likely yes, and it sounds too good to be true because it’s not the reality of the accessible platforms in North America at this moment. Again, the security parameters and functionality are priorities before this can roll out nationwide. Personalization is everything to consumers. Open banking could take this a step further when properly integrated into FinTech platforms around the world.

The Takeaway

Think about how you shop on Amazon and watch Netflix or YouTube. These platforms have “more of what you like” algorithms that show you exactly that. Now are these sales tactics? Of course, FinTech and open banking are no different in that they are businesses and you are the consumer. However, is this a bad thing? Are these platforms wrong for doing this? No, it is simply a way of providing options and creating value based on what you already like. While we track everything from how many steps we take to how many hours we spend on our devices, open banking will allow us to set and track our financial goals.

Written By Ben Brown

We work with successful companies to increase their net profits using exceptional custom software solutions, contact us here to see how we can help your business grow!

Digital banking is a product of the future, and the market for businesses operating in this field is continually growing. A successful digital banking service does not have a niche group they market to. They instead set their horizons on a future where everyone is using this technology and construct a platform made for it.

This vision of a future that utilizes this kind of banking is the marketing tactic that should be pushed when marketing the service. You probably think of online banking as your TD, Scotia, RBC, Bank of America, Chase, or whichever app/website you can check your balance and make transfers through. Why do you use these services? Did you see an ad for it and become compelled? Hear about it from other people?

We utilize this technology daily but most of us may not even realize the extent it could reach 10 or 20 years from now. This is the starting point for companies getting into and growing their digital banking services. Not only are you trying to influence clients, but you want to attract investors to your business to give you the means of operating long term.

With that said, here are some mistakes to avoid:

Not Educating People About Digital Banking

Not every generation can grasp the concept of digital banking. Some still believe it is as simple as a bank that has an app or website they can make changes through (though that’s a common marketing strategy). There are then a handful of people confusing it with the cryptocurrency exchange market. We’re seeing a pattern here…

Not investing in a simple promotion of what your industry is will be something you regret down the line. Before you promote your services, show the vision in which your service was inspired.

Lack of Transparency

With traditional brick-and-mortar banks, customers have trust in them. Though they may not realize shareholders are backing these businesses, to the average customer, they are secure. This may make consumers question how safe it is to switch to an online banking service. With no physical place to access a bank account, the business could disappear forever at any moment for all they know.

As a company operating in this field, you want to be open about your capabilities and reasoning for services. For example, if you are still in the testing phases with your app, be open about that with your customers. It will hurt your company's reputation if you claim to be established while still developing. On the other hand, people may feel inclined to help a new company, especially one that is honest with the development stage they’re at.

Poor Customer Service

Customer service may be the deciding factor when someone takes your business over another and vice versa. Especially with an online service, quick and efficient customer service is a requirement for building long-term client relationships. Additionally, this will benefit your reputation and get your name out into the market.

With traditional banks, customers can deal with someone in person and have their needs met, but usually over a longer period. A paperless and quick customer service experience should act as the first floor to your online company's skyscraper.

Lack of Security

Stories of security breaches and hackers are a common concern for those looking into digital banking. Rightfully so, which makes it important to not only ensure security but have the means to support the claim.

A digital banking company with a reputation for strong security is guaranteed to attract attention. It is a strong marketing message and a definite way to sustain a platform of customers.

Conclusion

As a digital banking service, you hold unforeseen opportunities. This is a service of the future and one that requires you to keep up with innovation. The need for banking access will never die out, so how is your company going to make a difference?