Digital-First Banking Tracker® Series Report

Can Banks and FinTechs Bridge the Divide to an Open Banking Future?

February 2024

Is open banking set to rewire the consumer payment experience, or will security concerns stifle the breakthrough?

PYMNTS

Through open banking, banks and FIs could go far to satisfy consumer demands for enhanced payment experiences and drive adoption of innovative banking tools, thereby positioning themselves as leaders in the dynamic open banking landscape.
Open banking holds immense potential to radically enhance the payment journey, but its widespread adoption remains held back by concerns over data privacy and security, both of which are significant roadblocks to building consumer trust. Banks and FIs are slowly acknowledging these obstacles and working to address them.
The regulatory landscape for open banking is in its early days, but activity is intensifying. Regulator and stakeholder participation should focus on codifying a regulatory framework that balances the needs of consumers with the requirements of banks and FIs — key for broader consumer acceptance of the open banking system and its long-term durability.


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    By igniting a new wave of innovation in the financial industry, open banking promises to unlock a profoundly enhanced consumer payment experience. Its architecture not only facilitates faster payment methods but also allows banks and financial institutions (FIs) to explore new revenue channels, strengthen customer engagement and collaborate with FinTechs on groundbreaking payment services. However, challenges are postponing this new chapter in the payments space.

    Because open banking grants multiple stakeholders access to sensitive financial data, a robust regulatory framework is a must to protect consumer interests and promote industry growth and innovation. Application programming interfaces (APIs) serve as the technological bridges connecting these stakeholders, but other, less tangible gaps must be closed to overcome consumer fears and help shape open banking standards. Bridging this divide — and rising to the open banking challenge — will require banks and FinTechs to meet each other halfway.

    When Time Is Money: The Unfulfilled Promise of Fast Payments

    Through open banking, banks and FIs could go far to satisfy consumer demands for enhanced payment experiences and drive adoption of innovative banking tools, thereby positioning themselves as leaders in the dynamic open banking landscape.

    Benefits of
    open banking

    Enhanced customer experience:
    Open banking allows for more personalized banking and financial services.

    Increased competition and innovation:
    New market players can offer a variety of financial services that increase consumer options.

    Improved financial management:
    Easier access to financial data can help consumers manage their finances more efficiently.

    Key features enabled
    by open banking

    A2A transfers:
    These move money directly between accounts at different banks without intermediaries. This is faster than traditional transfer methods and can reduce transaction costs.

    Pay-by-bank services:
    These allow customers to pay for goods and services directly from their bank accounts, bypassing traditional payment methods like credit cards.

    What is open banking?

    Open banking is a financial framework in which banks and FIs allow third-party FinTechs to access consumer banking, transaction and other financial data through APIs. This access, given with customer consent, enables the development of new financial services, including options for faster — and potentially cheaper — payments. Among these are account-to-account (A2A) transfers, pay-by-bank services and real-time payments. Open banking’s ultimate goal is to expand consumer options by encouraging competition and fostering the personalization of financial services.

    Legacy banking’s slow pace lags in a fast-paying world.

    The legacy banking system is still wrestling with the long-standing issue of delayed payouts. Even as open banking tools offering instant payouts emerge on the retail banking scene, PYMNTS Intelligence data shows that nearly half of consumers still wait up to a week to receive payouts directly into their bank accounts — a stark disconnect from the 43% of consumers who cite real-time payments as a decisive factor in their choice of payment method.

    Open banking ensures that A2A transactions begin to thrive.

    Open banking has paved the way for much faster and more efficient payment methods, with A2A transfers taking center stage. PYMNTS Intelligence research shows that 84% of A2A users are highly satisfied with their preferred A2A platforms. These consumers praise the ease of use the method provides and highlight the quick access to funds and security of these transactions — clear indicators of open banking’s potential to improve the payments landscape.

    FIs are ‘PaaS-ing’ the baton of payment processing to businesses.

    The banking industry, for its part, is striding forward to meet the strong demand for fast and user-friendly payment services. A recent study by Volante Technologies underscores the growing interest in faster payment networks among United States FIs, with 78% deeming them essential. Illustrating this change in outlook is the rise of the payments-as-a-service (PaaS) model — third-party cloud-based services that enable primary businesses to process transactions without needing their own physical infrastructure. PaaS is currently anticipated to overtake traditional banking data centers as the preferred method for payment processing. Indeed, 50% of mid-tier FIs are already utilizing or implementing PaaS — a leap from a mere 11% in 2021.

    Banking on Trust: Overcoming Open Banking’s Achilles’ Heel

    Open banking holds immense potential to radically enhance the payment journey, but its widespread adoption remains held back by concerns over data privacy and security, both of which are significant roadblocks to building consumer trust. Banks and FIs are slowly acknowledging these obstacles and working to address them.

    84%

    of U.K. consumers
    do not yet fully
    trust open banking.

    Lack of trust and understanding are barriers to the adoption of open banking.

    While consumers are waking up to the benefits of open banking, a general lack of understanding and trust are significant hurdles in the way of broader acceptance. Sixty percent of consumers in the United Kingdom have yet to grasp the open banking concept, and 84% do not fully trust it. This gap between the benefits of opening banking and the state of consumer sentiment underscores the critical need to address security concerns and raise overall awareness — turning skepticism into an opportunity for growth and customer engagement.

    Cybersecurity fears cast a shadow on open banking’s potential.

    Open banking’s adoption is gaining momentum, but legitimate concerns about cyberattacks persist. In the last year, 77% of financial industry organizations registered a cyberattack. On the consumer side, nearly half of American consumers have fallen prey to scams or fraud, prompting heightened fears about data security in what remains a nascent open banking environment. The increasing sophistication of cybercriminals furthers this anxiety, with 62% of consumers voicing concern about advanced fraud schemes.

    Banks up their open banking security game.

    As consumer fears of cybercrime escalate, banks and FIs are ramping up their efforts to enhance security. In a decisive step toward rebuilding consumer trust, 86% are arming themselves with new technologies to combat emerging cybersecurity threats. Despite the proliferation of these threats, a remarkable 64% of consumers globally regard their primary banks as reliable custodians of their money and data. Still, banks and FIs have much to do in this area: The remaining 36% demand further investment and transparency in security strategies.

    Rule-Makers and Risk-Takers: Open Banking’s Regulatory Tango

    The regulatory landscape for open banking is in its early days, but activity is intensifying. Regulator and stakeholder participation should focus on codifying a regulatory framework that balances the needs of consumers with the requirements of banks and FIs — key for broader consumer acceptance of the open banking system and its long-term durability.

    The CFPB’s proposed rule

    puts consumers in the
    driver’s seat of controlling
    their data in a win for
    trust and open banking.

    The CFPB’s proposed rule represents a leap toward consumer empowerment in open banking.

    The U.S. Consumer Financial Protection Bureau (CFPB) recently proposed a rule that marks a significant turn toward consumer empowerment in open banking by placing consumers in the driver’s seat of sharing their financial data. In an ecosystem currently characterized by variable data sharing policies, the Personal Financial Data Rights rule aims to standardize access to consumer financial data and prevent its misuse by companies, thereby curtailing the power of incumbent FIs to withhold key consumer data points. The rule ultimately seeks to empower consumers to decide whether to share their financial data, such as transaction history, across the open banking system without fear of manipulation or misuse for commercial gain.

    Banks and FinTechs lock horns over data access fees for open banking.

    The proposed open banking rule has also sparked a tug-of-war between banks and FinTechs. On one hand, banks are fighting for the right to levy small data-access fees on FinTechs, citing them as necessary for managing new programmable interfaces. On the other hand, FinTechs are warning that such fees could limit access to consumer data. Meanwhile, security practices like screen scraping are under fire from banks and FIs for their potential to expose sensitive customer information. This debate underscores the complexities involved in balancing innovation and fair access with security in the evolving open banking landscape.

    Feedback rolls in for amendments to the CFPB’s proposed rule.

    Stakeholders from all sides are proposing amendments to further refine the CFPB’s proposed rule to boost open banking. The Future of Privacy Forum is endorsing privacy as a cornerstone of the open banking industry, on which the prohibition of screen scraping rests as a fundamental pillar. Meanwhile, the American FinTech Council continues to highlight the need to establish standards related to the use of consumer data, stressing that this usage should not be hindered if it could ultimately benefit consumers.

    A Roadmap to Open Banking’s Triumph Over Tribulations

    Through such breakthroughs as real-time payments and A2A transfers, open banking has the potential to improve the payment experience for the entire gamut of financial industry participants — from banks to FinTechs to all the consumers who transact. Nevertheless, lingering security concerns, limited consumer understanding and an ongoing regulatory saga over data access continue to impede its progress. Banks and FinTechs, therefore, must work to foster consensus on data access standards throughout the industry.

    PYMNTS Intelligence prescribes the following actionable roadmap for FIs:

    • Help shape open banking regulations: Engage regulatory bodies such as the CFPB and collaborate with industry groups to shape the direction of open banking in ways that balance innovation, fair data access and consumer data protection. Resolve the ongoing disagreement with FinTechs over data access, and support a rules-based framework that standardizes access to consumer financial data and its ethical use, thereby strengthening consumer trust in open banking.
    • Implement advanced security technologies: Alongside visible front-end features such as biometric authentication, integrate sophisticated back-end security systems. These might include advanced encryption methods for data at rest and in transit, as well as artificial intelligence (AI)-driven behavioral analytics for real-time fraud detection. Cultivate consumer confidence and trust in the open banking system by transparently communicating the efficacy of these security technologies.
    • Develop comprehensive education initiatives: Launch targeted awareness campaigns for both consumers and internal staff. For consumers, explain the benefits, security features and use cases of open banking, perhaps through interactive digital guides or in-branch workshops. For internal staff, focus training programs on regulatory compliance and customer engagement strategies in the open banking context. This dual approach ensures that both consumers and financial industry staff are well-informed, fostering a more secure and efficient open banking ecosystem.
    • Create open banking innovation labs: Establish dedicated teams to leverage open banking capabilities and develop personalized financial products that cater to evolving consumer needs. Forge partnerships with FinTechs to promote knowledge exchange and innovation.

    Open banking could be a paradigm shift for innovation and consumer empowerment in the financial industry. This trajectory hinges on the efficacy with which banks and FIs can harness its potential to redefine the next era in payments.

    About

    NCR Voyix Corporation (NYSE: VYX) is a leading global provider of digital commerce solutions for the retail, restaurant and digital banking industries. NCR Voyix transforms retail stores, restaurant systems and digital banking experiences with comprehensive, platform-led SaaS and services capabilities. NCR Voyix is headquartered in Atlanta, Georgia, with approximately 16,000 employees in 35 countries across the globe.

    Ingo

    PYMNTS Intelligence is a leading global data and analytics platform that uses proprietary data and methods to provide actionable insights on what’s now and what’s next in payments, commerce and the digital economy. Its team of data scientists include leading economists, econometricians, survey experts, financial analysts and marketing scientists with deep experience in the application of data to the issues that define the future of the digital transformation of the global economy. This multilingual team has conducted original data collection and analysis in more than three dozen global markets for some of the world’s leading publicly traded and privately held firms.

    The PYMNTS Intelligence team that produced this Tracker:
    Managing Director: Aitor Ortiz
    Senior Writer: Randall Brown
    Senior Content Editor: Alexandra Redmond
    Content Editor: Joe Ehrbar
    Senior Research Analyst: Augusto Solari


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