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Introduction to Open Banking and Banking as a Service

Open Banking provides consumers and corporations a safe and secure method of transmitting financial data to create an encompassing picture of a financial situation and creates a gateway to fintech innovation.

Figure 1: Open Banking by Distribution Channel (2018;2026)

Importance of Understanding Open Banking

Open banking, a modern communication method utilized by companies to safely and swiftly transmit consumer information from one institution to another. The average consumer has multiple financial accounts such as investment accounts, credit cards, checking accounts, etc.  This new concept that has grown exponentially over the last few years allows fast access to financial information from multiple sources, providing a holistic view of a consumer. The global open banking market size accounted for $7,295 million in 2018, and is expected to reach $43,152 million by 2026, registering a CAGR of 24.4% from 2019 to 2026. As shown in Figure 1, in 2018 the Application Market segment occupied the largest open banking market share. While Apps are still the dominant distribution channel, other channels such as Banking and Aggregators are growing exponentially and adopting new open banking capabilities.

Background and Overview of Open Banking

Open banking is a financial practice that provides third-party financial service providers access to consumer financial data from banks and non-bank financial institutions through the use of application programming interfaces (API). Simply, it is a way for financial institutions to automatically and securely share consumer data. By using API, consumer data is swifting and securely transmitted because the API acts as a software intermediary allowing different applications to communicate with each other.

 

When utilizing open banking, financial institutions grant access and control of customer's personal and financial data to third-party service providers. Customers are required to provide consent to this process and the sharing of their data, usually by checking a box or signing with terms of service. Once customer consent is provided, third-party service providers can use this data for a variety of actions. For example, third-party providers can link customer’s accounts and transaction history to offer a wider range of financial service options, like a new savings account with higher interest based on their account history. Open banking can help financial institutions obtain a more complete picture of a customer's financial situation to appropriately recommend products and services.

Figure 2: Open Banking by Financial Service (2018;2026)

Banking as a Service and the Benefit to Financial Institutions

Banking as a Service (BaaS) exists under the framework of the open banking concept and is a key component of open banking. While open banking provides third parties access to the data of existing bank customers, BaaS provides third parties access to bank functionality, so that non-bank companies can connect users outside of the bank’s existing footprint to banking services. BaaS allows providers the ability to build their own experience for customers, under their own brand, while being supported by the Bank’s infrastructure. Customers can then interact with another provider or brand entity under their Bank.

 

A benefit for a financial institution to become involved with BaaS is that the financial institution can establish deeper relationships with fintech services encouraging collaboration and new opportunities between banking and fintech sectors.

 

According to Allied Market Research, the Banking and Capital Markets segment occupied the largest open banking market share in 2018. The Payments segment is also the fastest growing segment during this period, with Digital Currencies and Value Added Services. (Figure 2).

Examples of Open Banking

A few notable top banks taking advantage of open banking include Barclays Bank UK, Citibank UK, The Bank of New York Mellon, and Wells Fargo Bank. Fintech firms also taking advantage of open banking include Yapily, Tokyo, Tink (acquired by Visa), and Airbank.

 

Open banking is transforming how banks interact with third-party providers; not just with fintechs but with each other as well. BBVA started its own BaaS in 2018, HSBC launched its connected Money App as a result of the UK’s open banking regulations attempting to give more control of financial data to consumers, and Barclays claims to be the first UK bank enabling its customers to view their accounts with other banks within the Barclays application.

How Sia Partners can Help

Sia Partners is ready to assist financial institutions in designing the most effective approach to secure data sharing while minimizing risk to our customer’s privacy and security. From our innovative approach to our expertise in AI and Data Science, Sia Partners can help you stay at the forefront and informed on the progress and regulations of Open Banking in the enclosed article

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