Modern Banking - Open Banking/Finance

what is open banking/finance?

is a policy framework that enables consumers to share their payment/financial data with third party entities by means of application programming interfaces.

• open banking = only transaction data of deposit accounts (only banks)

• open finance = more data (pensions, insurance etc) and other institutions

Why is open banking promoted?

-              Efficiency → Data is nonrival

-              Competition → Data is monopolized at the hands of a few

-              Innovation: Incumbent data monopolies have little incentive for innovation

-              Financial inclusion: New uses of alternative data can help alleviate information frictions in financial markets

-              Putting customer in control: A consolidated view of finances across multiple institutions, real-time insights into spending and budgeting habits, services that reflect personal financial behaviors and needs

What impact does open banking have on innovation and competition?

• fosters innovation and competition by allowing customers to share their financial data, enabling new companies to enter the market and breaking the data monopolies of big banks.

• increased venture capital investments in FinTechs.

what is PSD2 and its effects?

regulation that accepted open banking

we don’t really see the immediate effects of open banking because banks have to create APIs but it cost a lot of money and there is no standardization

-              Banks do the minimum

-              Each banks create specific APIs and FinTechs have to adapt to each of them (lot of money and time)

Ex.: in Germany there is a standard with guidelines that’s why the country does it better.

what is the impact of open banking on financial inclusion?

A larger use of cashless payments predicts

-              higher rates of loan approval

-              lower interest rates

-              lower rates of loan default

→ better speed and accuracy in risk assessment

-              reducing the need of collateral by allowing banks to monitor borrowers’ financial activities

What are the challenges of widespread adoption of open banking?

• High costs for banks, especially smaller ones

• Lack of clear rules discouraging investment in APIs

• Consumer distrust regarding data safety

• Potential for data misuse

• Uncertainty about who benefits most from open banking

• could change banks into plateforms

• BigTech could gain an unfair edge