Inclusive Finance: Unlocking the Power of Open Banking

Consumers are used to sharing their data to feed algorithms that inform companies and brands of their preferences so that, in turn, they can offer personalized recommendations or services.

Sometimes, we might feel that valuable information about ourselves is being handed over and that the main beneficiaries are not us – the individual – but corporations and Big Tech.

For years – decades even – social media platforms and organizations have been collecting our data and monetizing it.

But what if consumers had a choice about which organizations had access to their data? What if the data that consumers consented to sharing was taking place in a regulated environment or industry? And then, what if consumers were the direct beneficiaries of that data sharing, so that it markedly improved their lives?

It might sound like a sales pitch. However, in financial services, the concept of consumer-permissioned data sharing is already underway and is better known as open banking.

What is open banking?

In many countries worldwide, open banking starts life as a regulatory-driven initiative that means the incumbent banks and financial institutions (FIs) are mandated to share their customers’ banking and transaction data, with their consent, with third-party providers (TPPs) and other non-bank FIs.

Application Programming Interfaces (APIs) are the ‘channels’ by which consumers’ financial data is securely shared – the data request, or API call, is made by the TPP to the FI and the data is transported safely and securely to the organization requesting it.

At the heart of open banking is the idea that, by enabling secure and real-time data sharing between banks, TPPs and non-financial institutions, they will be able to design and offer products and services that better meet the needs of consumers.

For example, financial services providers can use the data to make more informed and accurate lending decisions. As a result, organizations are able to lend to individuals who previously would not have received a loan or credit based on their credit score and circumstances – after all, credit scoring is typically based on historical data that may no longer be relevant.

Delivered at scale, open banking has the potential to create a more inclusive financial system that offers a way into the financial system for the previously unbanked and underserved.

Open banking in numbers

According to figures published in October 2023 by Konsentus, an open finance technology and advisory services provider, there are more than 65 national open banking programs globally, with 68 countries – representing 35% of the world – where open banking has either been implemented or is in development.

Countries have tended to favour a regulatory-led approach to implementation, with Konsentus having found that 64% of open banking initiatives are mandatory by legislation.

With the ongoing rollout of open banking, there is evidence that a growing number of the global population are now users.

In May 2023, Statista put the growth of open banking users at an average annual rate of 50% between 2020 and 2024 and indicated that Europe would be the largest market. The Statista Research Department counted 24.7 million individuals worldwide as users of open banking services and forecast that this would hit 132.2 million by 2024.

The number of API calls being made is also expected to see a notable increase, according to Statista. It estimates that the number of API calls will grow from 102 billion in 2023, to 580 billion in 2027.

Similarly, open banking-enabled transactions are forecast to increase. These were valued at $57 billion in 2023, Statista reports, and are likely to be worth approximately $330 billion in 2027.

Measuring impact

It is worth considering what it means to be unbanked in today’s digital economy.

The World Bank’s definition of the unbanked is an individual without a formal account at a financial institution, which leaves them without access to regulated financial services. This leaves them reliant on cash and potentially exposed to illegal or unregulated means of getting hold of further funds in an emergency.

Individuals who are underbanked have a formal account but are not being fully served by the financial system, leaving them with little financial resilience. For example, they might receive funds in a bank account and then withdraw the entire amount as cash.

Emerging economies are likely to have higher numbers of unbanked individuals than developed countries, where there are more consumers who are underserved than unbanked.

How do we know whether open banking is moving the dial when it comes to financial inclusion? This can be challenging to measure and will differ from country to country, depending on levels of financial exclusion to begin with.

Use cases – or examples of open banking in action – are one way to measure its success.

In real life

In the UK, Open Banking Limited (OBL), which built the UK’s open banking standard and oversaw its implementation under the Competition and Markets Authority’s Order, provides several case studies. OBL uses these to “highlight the practical uses of this financial innovation in day-to-day life”, it states on its website.

One of these is HM Revenue & Customs’ use of open banking to help individuals pay their tax bill – an example of a far-reaching use case that is generally considered “pioneering”. In 2021, HMRC became the first tax authority in the world to implement open banking to collect taxes from UK citizens.

Individuals who choose to use open banking to pay HMRC will have their payment reference and the amount they wish to pay passed on, in an encrypted format, to third-party open banking provider Ecospend, allowing HMRC to collect the payment.

Open banking used in this way has reduced instances of human error, which tend to result in over- or underpayment of taxes, or in individuals not receiving a payment, such as a refund from HMRC. Given that Ecospend also checks that a bank account is real and belongs to the person, open banking also protects individuals from fraudulent activity.

Another use case highlighted by OB is Plend, an alternative lender which addresses the issue of the ‘credit invisible’ and those with a ‘thin’ credit file.

That is, those people who fall outside of the credit-scoring system, leaving them unable to access often even the most basic financial services, or whose credit file is based on inaccurate and outdated information. Typically, these are people who are young, new to the country or who are financially vulnerable.

Conclusion

These use cases showcase just some of the ways in which consumer-permissioned data sharing is improving financial lives. In the just over six years that open banking has been ‘live’ in the UK, there are already some innovative and life-changing use cases in evidence. Throughout the world, those countries that have embraced open banking are putting consumers in control of their own financial lives by, crucially, giving them ownership and choice.