How Open Banking APIs are Changing Fintech and Online Retail

Open banking is the use of open APIs (application programming interfaces) from a financial institution that allows third-party developers to build applications and services based on it. Open banking allows the account holders financial transparency options by opening up closed banking systems, such as open data or better personal financial management.

Open banking will soon become a very popular trend for fintechs and impact the future of online retail. This article will examine the secret sauce of how open banking APIs are re-imagining these industries.

How Open Banking APIs Enable Access to Financial Data

Open banking refers to the ability of third-party providers to access a consumer’s financial data through APIs. In enabling secure sharing of financial information between banks, financial technology providers and other approved applications, these APIs provide the ability to share financial information securely.

Any of these are examples of how you can use an open banking API to include the following conversations in your app: A budgeting app could get data from your bank’s transaction history, an accounting platform could integrate with multiple bank accounts, or a financial advisor could analyse your finances.

Fintech apps can access these financial data directly and securely without the need for users to screen scrape data, download bank statements, or provide their passwords to access the financial account. This makes it possible for fintech developers to focus on developing apps and services based on personal financial management, investments, accounting and financial advice. To explore cutting-edge open banking solutions, visit https://www.luxoft.com/industries/banking/open-banking. 

Key Impacts on the Fintech Sector

Open banking is rapidly changing the fintech landscape in five key ways:

Enabling Better Financial Apps and Services

Open banking removes a major barrier to fintech innovation by providing direct access to financial data. Developers can dream up ideas for new financial tools without worrying about the technical challenges of aggregating financial data. For example, apps like Cleo and Emma use open banking to analyse spending and provide budgeting advice.

Growth of Banking as a Service

New banking as a service, in turn, fuels open banking, which enables nonbank companies to use APIs to integrate financial services rather than needing to be licensed banks. Railsbank and Solarisbank use open banking to create providers that offer banking functionality as a set of API services. These can be tapped into by Fintech companies to allow payments, account creation, lending, card issuance, Know Your Customer (KYC) checks, etc.

Better Personalised Services

With open banking, FinTech apps have the ability to access their transaction history, spending behavior, account balance, etc. They can thus provide hyper-personalised services based on a user’s very specific financial behavior and needs. Cleo and Plum are apps that use these data to recommend how to save money, cut down on subscriptions and fees, etc.

Streamlining Accounting, Tax, and Business Finance

Open banking allows accounting, bookkeeping, taxation platforms, and other business finance apps to connect with company bank accounts automatically to import and categorise transaction data. This removes tedious manual work, allowing businesses to track revenue expenses, prepare taxes, and manage finances more easily. Providers like Float, ANNA Money, and Coconut leverage open banking for streamlined accounting.

Enhanced Financial Advice Capabilities

The depth of data available through open banking allows financial advisors and investment platforms to accurately understand a person’s overall financial health across all their financial accounts. This information powers robo-advisors like Nutmeg, which provides personalised investment recommendations tailored to financial goals and risk tolerance. Human advisors also benefit from using open banking data to advise clients better.

Transforming Online Retail

While open banking is clearly impacting the emergence of new fintech apps and services, existing online retailers are also harnessing the potential of open banking in three primary ways:

Enabling Faster Digital Payments

Open banking brings competition to digital payments while providing merchants access to real-time payments via bank transfers. Payment initiation APIs allow online checkout flows to connect directly with the customer’s bank to enable a push payment versus using a debit/credit card. This pulls money directly out of the buyer’s bank account with their permission. These open banking payments enhance security, reduce merchant processing fees, and enable instant transfers.

Personalising the Shopping Experience

With customer consent, ecommerce merchants can tap into open banking APIs to access shopper financial data to provide personalised promotions, product recommendations, and tailored pricing based on transaction history and spending habits. For example, if a clothing retailer sees you spend a lot at fitness studios, they could promote activewear to match your tastes. While privacy concerns remain, open banking creates opportunities to hyper-personalise shopping.

Providing Credit Offers at Checkout

Merchants can leverage open banking to identify qualified customers for instant financing promotional offers at checkout. Instead of generally offering all customers the same generic financing or buy now, pay later option, open banking lets retailers use financial insights to present targeted offers to customers identified as having the ability to utilise credit safely. This helps drive more sales conversions while reducing the risks of non-payment.

Key Statistics on Open Banking Adoption

As the adoption of open banking increases, its impact on fintech and retail will continue to grow. Here are some key statistics that demonstrate the accelerating pace of open banking:

• Though the difference is still closing, small business consumers still show more open-banking penetration than retail consumers. Whereas small company penetration has increased to 18% (1 in 5), retail penetration is 13% (1 in 7).
• 70% of SMBs are interested in open banking services to manage cash flow, accounting, and payments.
• The open-banking market is expected to rise at a compound annual growth rate (CAGR) of more than 22% between 2024 and 2032, valued at around $23.5 billion in 2023.
• 66% of consumers are willing to share financial data for personalised services.
• Over 45% of consumers are interested in pay-by-bank open banking payments.

Clearly, open banking is gaining significant consumer and business interest - which will ultimately drive more fintech innovation and retailer adoption.

Key Examples of Open Banking Innovation

To see open banking in action, here are some leading examples of fintech apps and retailer use cases harnessing open APIs:

• Cleo - Uses open banking to analyse spending and provide budgeting advice, personalised insights, and financial tips to help consumers manage their money.
• Plum - Intelligent chatbot that leverages open banking APIs to identify how you can optimise spending, reduce subscriptions, save more, and hit financial goals.
• Tink - Enables banks, fintechs and developers to build personalised financial management tools, products and services by enabling access to financial data.
• TrueLayer - Open banking payments platform that lets merchants accept real-time bank transfers via open banking account-to-account payments.
• GoHenry - Prepaid debit card and financial education app for kids that uses open banking to teach children responsible spending habits. Parents can set controls and get insights into spending.
• ANNA Money - Business financial management platform using open banking to automatically centralise financial data from multiple accounts and partners to enable invoicing, accounting, and tax preparation.
• Monzo - A digital bank that leverages open banking to allow customers to analyse spending across accounts and cards easily, receive intelligent notifications about subscriptions and fees, and more.
• Revolut - Neobank uses open banking APIs to display aggregated financial data across accounts, provide budgeting controls, send money instantly, and accept global payments.
• ClearBank - The UK’s first clearing bank to offer open banking APIs directly, enabling payments, account services, and financial data access to licensed startups and financial institutions.

The Future of Open Banking

As more financial institutions continue implementing open banking-compliant APIs, we will see increasingly advanced and integrated financial services. The open data environment enables the financial ecosystem to leverage shared customer-approved data for better applications.

In the end, open banking gives consumers the power to securely share their data with trusted financial apps or services that offer more transparency, savings, advice, control, and convenience tailored to their needs.

In the future, open banking is expected to expand even further into more data, including pensions, investments, mortgages, insurance and tax data, among others, to enable a one-stop shop, personalised financial dashboard.

While adoption remains in the early stages, open banking is laying the foundation for the future of financial services - one that is digitally connected, insights-driven, highly personalised and customer-empowered. The opportunities for fintech innovation and online retail personalisation are endless, thanks to open banking APIs.