But as with any emerging technology standard, progress is littered with both milestones and speed bumps. Below I will outline some of my key observations from working with leading players in this space.

Open Banking will reshape the global financial services system

It is no longer a question of if Open Banking will continue to evolve, but a question of how quickly it will accelerate. As Open Banking’s remit continues to expand, it will fundamentally change how we use financial products.

Open Banking can be used to assess a consumer’s creditworthiness, for example, by opening the doors to novel products aimed at supporting financial health and inclusion. 

The complex world of credit scores will be simplified through the transparency Open Banking provides. Authorised Open Banking fintechs can securely access a customer’s bank account to see incoming and outgoing transactions, providing a foundation from which to accurately assess users’ credit scores and personalise services accordingly. 

Personal Financial Management platforms (PFMs) like Money Dashboard are leveraging Open Banking technology to provide their clients with insights into transaction behaviour. Its retailer clients, such as supermarket chains, benefit from a better understanding of what their customers spend their money on when they are shopping at other stores. Its investor clients, meanwhile, use the data to predict how companies are operating in order to decide whether to invest in a stock. 

Another example of a company paving the way forward is Bud – which is demonstrating what is possible through Open Banking-powered personalisation and AI automation. Banks use Bud’s products to automate lending decisions and perform more accurate affordability checks – improving risk assessment while delivering more tailored services to their customers. 

From Open Banking to Open Finance

In the future, Open Banking will evolve into Open Finance, meaning that data-sharing will not be limited to transactional bank account data only. Other types of (financial) information will become accessible to authorised third parties, creating a more interconnected financial ecosystem.

Crypto wallets, pensions, insurances, mortgages, stock trading and other wealth management accounts – will all become accessible to facilitate easier exchanges of data, helping providers to establish a comprehensive digital overview of a customer’s financial position and encourage continued innovation. 

These benefits will not be limited to retail customers. Another important area of expansion will be to use Open Banking solutions in the B2B space. Highlighting the potential use-cases, McKinsey estimates that merchants collectively spend $100 billion annually on transaction fees. Through account-to-account (A2A) payments, Open Banking players are already enabling the direct transfer of money between accounts without relying on third-party intermediaries or payment cards – offering a real-time and cost-effective solution to the problem. 

Overcoming the biggest challenges

There are three main obstacles on the road to Open Finance:

1. Access to data

How do we make it easy for providers to access data from a broad range of financial institutions? Technological integrations (APIs) must be built to support the efficient flow of data, but building integrations that work with each financial institution is a tedious and fragmented process. To facilitate this, data and API standardisation needs to be implemented in order to make the task of providing access to data across the whole ecosystem simpler.

On the other hand, the reluctance of institutions to share highly valuable customer data will restrict access. This means regulators will need to step in – as they did for Open Banking – to create a legal environment that opens financial data for third parties to access through standardised APIs. 

2. Analysing the data

Making sense of huge volumes of data is already a gargantuan task, even when it “only” covers Open Banking data. This becomes even harder if data from a wider set of financial products is considered. Fintechs will need advanced categorisation engines and other analytical tools to structure and analyse the information they receive.

Fintechs and companies can have access to all the Open Banking data in the world, but if they cannot create a way to analyse it, they will struggle to draw out any valuable insights. Leading providers like Money Dashboard have already done the legwork when it comes to data analysis – its Open Banking categorisation engine has been trained on over 10 years of data, which allows it to accurately classify consumer transactions. Other providers must follow suit if they haven’t already. 

3. Compliance 

Whenever personal information is shared, it is crucial to have a stringent compliance framework in place, to prevent any breaches or misuses of data. This, however, is not the challenge – the real challenge is ensuring that regulation protects the consumer, without stifling innovation. 

In order to achieve this delicate balance, regulators will need to have open and constructive dialogues with Open Finance providers, and together create an environment that nurtures innovation without threatening data privacy. 

An M&A outlook

Open Banking is still a relatively early-stage technology, so we will continue to see a lot of investor activity in this space, with the market expected to grow to $43 billion by 2026.

Companies with an innovative product and state-of-the-art tech will have no problems raising funds. For instance, UK-based Bud raised $80m in June to continue to scale its AI-based Open Banking platform and expand internationally. 

In the M&A space, we expect to see an increase in activity as small, unprofitable companies (who have developed good technology) might decide to look for a buyer as Venture Capital funding becomes harder to access. Some of the industry’s largest players could also merge in order to consolidate the market, create synergies and expand their reach. 

Notably, Apple’s recent acquisition of Credit Kudos, which develops software that uses consumers’ banking data to make more informed credit checks on loan applications and is a challenger to the big credit reporting agencies (Equifax, Experian and TransUnion)., signals interest from further afield. With more and more businesses making inroads into financial services, M&A activity in this space is heating up.  

Having advised on a number of M&A and fundraising transactions in the Open Banking space, Royal Park Partners have seen first-hand the impressive leaps companies are making to transform Open Banking and increasingly Open Finance into a positive and productive tool for customers and businesses. In the future, Open Finance will provide the infrastructure to connect all financial products that consumers and businesses use, while also providing access to innovative new solutions.

The digital imperative for financial services firms cannot be understated. In order to ensure their (and their products’) relevance in the future, they will have to embrace Open Banking and Open Finance technology.

About the author: Ricardo Falter is Fintech M&A Associate at Royal Park Partners.

Andria Evripidou, Policy Lead at Yapily, shares her thoughts with Finance Monthly on the state of finance in Europe and its opportunities for improvement.

Fragmentation has been one of the biggest obstacles to growth in the European Open Banking ecosystem to date. Even within the Berlin Group, there are differences in how banks communicate with technology companies and how they connect with APIs.

Because of this disparity, Europe has been slower to adopt Open Banking than the UK and other countries around the world. There were 178 firms in the UK permitted to share bank account and payment information with third party providers (TPPs) in 2020, but only 36 in Germany, 18 in France, 9 in Spain and 6 in Italy.

There is a real opportunity here to consolidate the market and deliver more value-add financial services with the promise of Open Finance. Promoting innovation and creating a level playing field for all payments and data companies, while giving consumers greater visibility over their data and enhancing their financial wellbeing.

Open Banking is the first mile in the Open Finance marathon, and Europe’s regulators are starting to make their next moves towards crossing the finish line.

Catch me if EU can

There are a number of different factors that have contributed towards the fragmented Open Banking landscape we see across Europe today. In some countries, like the Netherlands, consumers have deep-rooted trust in their banks but a distrust in cards. As such, iDeal, an eCommerce payment system initiative driven by Dutch banks, was quickly adopted when it launched in 2005.

In comparison, the level of enforcement by National Competent Authorities (NCAs) of PSD2 requirements was patchy in places. Which in turn created a fragmented approach to PSD2’s implementation across central Europe. And so led to mixed uptake in adoption.

There is a real opportunity here to consolidate the market and deliver more value-add financial services with the promise of Open Finance.

How developed a country’s financial ecosystem is has also played a role in Open Banking adoption. Eastern European countries, for example, that have more outdated financial products and infrastructure have been more receptive to innovation than countries with more advanced financial systems that already meet consumer needs.

The ingredients for Open Banking success

The maturity of the market is intrinsically linked to the adoption rate – adding another layer of complexity to the landscape. Those in the industry know and can see the potential of Open Banking and Open Finance. But wider consumers and businesses are still in need of educating on its benefits and security.

There are active discussions and working groups on how to move Open Banking adoption forward. To address the issue and catch up with the UK and other countries like Australia, the European Banking Authority (EBA) recently published its views on what NCAs should do to further adoption across the region. The aim was to ensure they remove any remaining obstacles that could prevent TPPs from accessing payment accounts or which restrict EU consumers’ choice of payment services.

This move has been well received. It is likely that, going forward, Open Banking integration within Member States will become easier. Over time, this move should make payments via Open Banking more prominent within the mainstream.

An open future for Open Finance

The natural evolution of Open Banking is Open Finance, which has the potential to completely change the way we look at our financial lives and bring about the fourth industrial revolution. Use cases are boundless, and the primary objective is enabling people to properly understand and then ‘optimise’ their overall financial position, ultimately leading to greater financial inclusion for all.

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In an Open Finance era, consumers can get a better understanding of their investments using financial management applications that have a holistic view of an individual or business’ financial position in real-time. This will give consumers the ability to consider whether investments continue to meet their needs with access to up-to-date information on costs, tax treatment, performance, risk and other necessary factors.

The same consumer-centric approach that will see the rise of Open Banking across Europe will lay the road for Open Finance.

We have a lot to learn from the Open Banking experience to date to ensure the success of Open Finance. We also know that whichever shape the legislative framework ends up taking, Open Finance needs to be secure and easy to use, and that user journeys need to be properly considered ahead of any legislation design.

A lot more needs to be harmonised compared to the Open Banking experience. And without adequate supervision by NCAs, the implementation of directives is likely to be patchy and may hinder the uptake of Open Finance. But there’s no doubt that we will see the European Open Banking system consolidated in the coming years, giving way to the rise of Open Finance.