Professor of Entrepreneurship and Innovation, Saïd Business School, University of Oxford
The relevance and importance of Open Banking is soaring. BigTech is now helping to catalyse innovation within the sector.
Open Banking is the practice of sharing financial information electronically, securely and with customer consent. Application programming interfaces (APIs) allow third-party providers (TPPs) to access financial information efficiently, promoting the development of new apps and services.
Ideally, Open Banking should result in a better experience for consumers. With API usage doubling in 2020, in concert with a sharp increase in contactless payments and online banking following the COVID-19 pandemic, the streamlining of financial services has accelerated to a remarkable degree – and brought some much-needed resilience to the sector during a global crisis.
Open Banking: A wave of reinvention?
Banks have long held a privileged position of trust in society, safeguarding wealth and private information in the best interests of the consumer. Despite financial incentives and regulatory support to switch, almost 80% of consumers remain with traditional banks. From the 2008 financial crisis, and further accelerated by COVID-19, customers are now more willing to give a chance to new players in the banking sector.
Regulation is playing a role in this trend through the implementation of Open Banking, positioned as the catalyst for reinvention within the banking sector. Open Banking is a banking practice that provides third-party financial service providers open access to consumer banking, transaction and other financial data from banks and non-banks.
The aim of regulators in implementing Open Banking was to spur innovation by removing the substantial barrier to entry. This allows neo-banks and fintech organisations to enter the financial services market and compete alongside traditional banking institutions.
From the 2008 financial crisis, and further accelerated by COVID-19, customers are now more willing to give a chance to new players in the banking sector.
Technological takeover? BigTech in banking
Google, Amazon, Facebook, Apple and Microsoft dominate market share by leveraging their core offerings as multi-sided platforms for commerce and innovation. Alongside these BigTech giants, firms such as Uber, Netflix and AirBnB have enjoyed similar success by adopting platform business models, enabling them to capitalise on network effects to rapidly reach a tipping point at which they can dominate their markets. These innovation platforms continually expand their reach and functionality, creating an ever-greater lock-in of end users and discouraging the use of competing platforms which is enabling BigTech to expand their business models.
As banks are a 20th century platform model built around the current account from which additional services are bundled, creating consumer expectation for a one-stop finance shop, the industry is keeping an eye on the potential for BigTech to deploy platforms in the financial ecosystem.
Financial services are now offering BigTech the opportunity to further monetise their existing data stacks to create new and innovative banking products. BigTech’s acquisition of elements of the banks’ bundle could represent a path to market domination. With the regulatory landscape encouraging new entrants and banking customers favouring well-known brand names, it’s easy to imagine a future where BigTech plays an increasingly dominant role.
What’s next for Open Banking?
Regulators and policy makers must define the boundaries of data privacy and data usage across sectors in order to level the playing field between entrepreneurial innovators and established BigTech platforms entering the banking sector. Without these boundaries and regulations, the network effects created by access to cross-sector data (i.e. data network effects) will continue to increase the power of BigTech platforms in every sector, including banking.
Ultimately, the financial services industry is transforming into a tech industry at an unprecedented pace. With the platformification of banking and BigTech playing an increasingly dominant role, industry professionals are hard pressed to keep up with the changes and ahead of the opportunities.
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