The words “open” and “banking” have developed a specific association in recent years. However, it won’t be long before we abandon the “openness” of open banking as something inherent, in the same way that “digital” becomes largely unnecessary in “digital banking” today. .
Whatever terms you choose to describe what is going on, the banking industry is opening up. And change is happening quickly. Below are four of the ways we predict the industry will evolve into the rest of 2021 and beyond.
1. The opportunity for financial inclusion
Whether on purpose or by chance due to government agendas, the financial incentives for banks, credit unions and fintechs around financial inclusion are more important than ever. According to a study by Mastercard and Kaiser Associates, the global odd-job economy, for example, is expected to be worth $ 455 billion by 2023. In addition, unbanked and underbanked populations are an important proposition. This is particularly the case in an increasingly crowded primary banking market.
( Read more: Expand your base by serving the unbanked and underbanked)
We see examples of this all over the world. Granting credit through alternative scoring methods or real-time early access to part of a paycheck, for example, is as relevant for the almost cashless Sweden as it is for Egypt which is reducing liquidity in their open banking programs. And supporting electronic identifiers as open banking expands into open finance is as important to myGovID in Australia as it is to the Aadhaar biometric identification system in India.
2. Digital currencies are becoming mainstream
Stablecoins – cryptocurrencies backed by cash or other approved financial instruments – make digital currencies viable options for consumers and businesses. By disseminating synchronized copies of financial records among multiple parties, distributed ledger technology is evolving to make privately issued stablecoins a secure and easily transferable digital asset.
Central banks are also developing their own digital currencies. Central Bank Digital Currencies (CBDCs) are issued by central banks and are designed to function as a new form of “cash” that might even be programmable. The Bahamas recently became the first country to allow individuals to bank directly with their central bank using digital sand dollars pegged to Bahamian dollars.
The aim is to improve the efficiency of the provision of financial services on the islands. A prepaid card already allows people to instantly convert Sand dollars into Bahamian dollars for shopping. And as CBDCs emerge across the world, open banks will not be far off, as commercial banks and fintechs will become the interfaces between central banks and their new customers.
3. Cloud-based infrastructure upgrades
Agile business models and customer responsiveness were once touted as a way for fintechs to compete with the industry expertise and brand recognition of traditional financial institutions. Competition then gave way to collaboration, as newcomers and incumbents realized the strength of partnerships. But, with digital banking, banks and credit unions can no longer rely on their fintech counterparts to make up for gaps in existing internal infrastructure.
The financial efficiency of the cloud doesn’t just come from external data storage, which eliminates the need to maintain outdated servers and hardware or worry about data backup. Mobile banking apps running in an open banking ecosystem also demand faster delivery of products and services. But real-time payment rails won’t mean much if the data to be loaded onto the rails cannot be accessed in real time. Fluctuations in demand require the pay-as-you-go flexibility of the cloud to manage sudden increases in bandwidth requirements cost-effectively.
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4. Mix of payments and loans
Debit cards have recently taken all the credit. For example, UK debit card spending rose 2.5% year over year in August 2020, while credit card spending fell 10%, according to the trade association UK Finance. Immediate causes include consumers forgoing major purchases during Covid-19 and stimulus checks paid on debit accounts. These are short term changes.
( Read more: Buy Now, Pay Later Programs: Threats and Opportunities in the Banking Industry)
Long-term changes will come from installment payments through Buy Now Pay Later (BNPL). They were growing up before Covid-19 and are now thriving because of it. The challenges come from the way BNPL interacts with traditional card payments. Banks fear their cards may be disintermediated – fintechs worry about their “closed loop” connections with individual retailers not enjoying “open loop” acceptance of cards on payment networks. The solution will come from network payouts providing the same payout technology to banks and fintechs.
Banks face increasing competition from fintechs, third-party lenders, and large tech companies as customer demands evolve. Opening up the industry through innovations in banking and payments offers customers more choice as improved products and services give them greater financial control.