Interesting opinion piece posted at TechCrunch and something that we have been increasingly covering in member research as well, although there are many aspects of the subject and approaches to understanding the implications of open banking. The author is experienced as a project manager at several fintechs and provides a perspective around the impact that open banking fintech initiatives are already having and likely to increasingly impact the SME space globally going forward.
Readers will likely know that there has been a record number of early-stage funding rounds for startup fintechs across NA and Europe, even during the pandemic. Part of this can be attributed to legislation such as PSD2 but an even more propelling factor is likely market pressure through the advancement of API usage, driven by client demands.
“The fintech sector has been hugely successful (and hugely profitable) for much of the last decade, and even more so during the pandemic. But it might come as a surprise to learn that many in the industry believe that the story is just beginning and the sector is poised to achieve much more, with fintech’s next decade expected to be radically different from the last 10 years….Long before the pandemic, the way in which banks were regulated was changing. Initiatives like Open Banking and the Revised Payment Services Directive (PSD2) were being proposed as a way to promote competition in the banking industry — allowing smaller challenger firms to break into a market that has long been dominated by corporate titans….Now that these initiatives are in place, however, we’re seeing that their effect goes way beyond opening up a gap for challenger banks. Since open banking requires that banks make valuable data available via APIs, it is leading to a revolution in the way that small and mid-size enterprises (SMEs) are funded — one in which data, and not hard capital, is the most important factor driving fintech success.“
The gist of the piece is hard to argue with because SMEs (especially the <$50 million annualized revenue groupings) have always found themselves at the short end of the stick when it comes to compelling and customized products for their use since traditionally bank product development and profitability models skew towards lower risk and higher transaction volume clients. So the author goes on to discuss the legacy of open banking and the opportunities created by data. As that legacy model moves from consumers (who seemingly trust their data to most anyone) into the corporate world, most significantly those businesses that have been historically underserved. Makes some good points and is worth the 5 minutes to review for those interested.
“If the U.S. banking industry can be convinced of the utility of open banking, or if it is forced to do so via legislation, several groups are likely to benefit:
- Consumers will be offered novel banking and investment products based on far more detailed data analysis than exists at present.
- The fintech companies who design and build these products will also see the use of their products increase, and their profit margins alongside this.
- Arguably, even banks will benefit, because even in the most open models it is banks who still act as the gatekeepers, deciding which third parties have access to consumer data, and what they need to do to access.“
Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group