The ability to access, edit, and share data has become imperative for individuals in the modern world. Consumers expect brands to provide a seamless online experience that is available 24/7 and offers endless opportunities for purchasing products, consuming services, and engaging in general communication with the company. However, we have witnessed that they innovate and digitize at a significantly slower pace when it comes to financial services. The reason for this is that many financial institutions rely on legacy systems with limitations in digitalization. They are restricted in terms of their capabilities and speed of innovation. This problem was first recognized by the community of innovators and later by regulatory bodies overseeing financial institutions. Regulators have identified the concept of Open Banking as one solution to accelerate innovation, increase financial inclusion, and improve accessibility.
Open Banking, in its simplest terms, refers to the practice where banks and financial institutions allow secure access to data to a third party based on user requests. This data includes transactions, account information, balances, and other financial details. From a technical perspective, Open Banking involves opening up internal services of financial institutions through open, standardized, and secure Application Programming Interfaces (APIs) to third parties, allowing them to create their financial products and services based on this data. In other words, Open Banking enables young, innovative, tech-driven companies to start offering financial services.
To better understand the practical benefits of Open Banking, let's look at one well-known example of its use. Imagine having an application on your smartphone that provides a comprehensive view of all the financial products you use across all banks – meaning you can see all your current accounts, savings accounts, credit cards, or loans. Furthermore, imagine that the app tracks how much you owe, how much you've saved, and your spending trends and provides advice on saving, spending, and investing your money wisely. In markets that support Open Banking, such apps are already a reality – look at examples like Nordigen, Yapily, or Mint.
From this example, it becomes clear that full realization of the benefits of Open Banking requires regulatory support and a regulatory framework. While opening one financial institution's data on the market is a good step, the most significant benefits come when the entire financial market participates in data sharing.
As of mid-last year, 80 countries had already started or established a regulatory framework for implementing Open Banking. Good examples of such legal frameworks include PSD2 (European Union), Open Banking Standard (United Kingdom), Consumer Data Right Act (Australia), Open API Framework (Hong Kong), and more.
In the Republic of Serbia, a regulatory framework still needs to support Open Banking fully. Still, the first steps have been taken towards creating such a system by introducing the SCA (Strong Customer Authentication) principle and opening individual sandbox environments for data access. However, the most significant barriers in our market are found in the regulatory ecosystem, which sets high entry barriers for new players, especially young companies that would use this data innovatively – often referred to as "fintech" companies.
Regulation in markets that require Open Banking involves banks exposing standardized interfaces to third parties, including interfaces related to customers, accounts, balances, and transactions. Besides the regulatory-required interfaces in Open Banking, many financial institutions offer additional interfaces to differentiate themselves from others in the same market. Examples of such interfaces include interfaces for securities trading, foreign exchange trading, and analytical data collection. These best practices show us how Open Banking can represent a business opportunity for traditional financial institutions. When initial Open Banking regulation was introduced, many conventional institutions saw it as a threat to their existing operations and increased competition. It turned out that liberalizing the market also brings many opportunities for innovative business models and collaboration, deeper customer engagement, and expansion into new markets. Today, these markets recognize banks that are leaders in collaborating with "fintech" companies, marking the emergence of a new banking area.
In addition to the perspective of financial institutions and innovative companies, it is essential to consider the benefits that Open Banking can bring to end-users, both individuals and businesses. Below are examples of critical results in this area:
1. Lower Costs for End-Users Due to Increased Competition: A higher number of solutions offering financial services naturally increases competition, transparency in pricing, and understanding of economic pricing policies. It also increases the manageability of financial instruments, allowing users to make informed decisions about their behaviour and fund placements, reducing their costs and increasing benefits.
2. Improved User Experience for End-Users: Innovative, tech-driven companies have more technological resources to dedicate time and attention to creating an optimal user experience. Banks, as stable and large institutions, continue to take care of systemic aspects, ensuring stability, security, and availability while innovating the user experience.
3. Lower Risk for Financial Institutions and Other Service Providers: Many solutions relying on Open Banking enable improved credit scoring and user assessment, thus reducing the overall risk to financial systems.
4. Integrated Solutions for Business Users: Open Banking-based applications can integrate classical ERP (Enterprise Resource Planning) functionalities and analytical systems with financial functions, simplifying operations typically challenging for business users, such as paying and tracking invoices, managing official expenses, and more. These solutions are often known today as "spend management" solutions and, in addition to ERP functions, include payment functions in the same answer.
5. New Opportunities for Entrepreneurs and Innovative Companies: Implementing Open Banking increases entrepreneurial activity and opens new opportunities for local companies to develop products and services based on Open Banking interfaces.
Implementing Open Banking indeed increases entrepreneurial activity and opens up new opportunities for local companies to develop products and services based on Open Banking interfaces.
Open Banking represents an excellent alternative to how the financial system operates, as we can see from foreign market experiences. Data indicates a constant increase in "fintech" companies worldwide, with a Compound Annual Growth Rate (CAGR) of executed payments through Open Banking exceeding 170%. The global Open Banking market is expected to continue to grow, reaching $128 billion from 2021 to 2030, with a CAGR of 26.8%.
These trends clearly show that individual and business users have recognized the benefits, and there is a significant demand for innovation brought by Open Banking. The need for innovation is widespread, guiding how we approach this concept in our local market. The Republic of Serbia is in an excellent position to apply all the lessons learned from needs requiring Open Banking and to enter the process prepared with responses to identified challenges.
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