The Core Commercial Models of Open Banking Explained

Over a decade ago, the concept of Open Innovation emerged, advocating for the sharing of ideas among innovators and enhancing the collective pool of knowledge. This approach has evolved into Open Banking, which allows third-party financial service providers access to banking and financial data, driving innovation in banking. 

Today, the global open banking market is growing rapidly, driven by fintech investments and demand for personalized services. According to IMARC Group, the global open banking market size reached US$ 25.6 Billion in 2023 and is expected to reach US$ 113.3 Billion by 2032.

However, its adoption has been slower than expected, highlighting the challenge of establishing sustainable commercial models. As we delve into the nuances of open banking, we explore its impact on products, technology, and policy-making, amidst calls for clearer commercial strategies to fully realize its potential.

Open banking at a glance

To set the context, let’s take a quick look at several key developments that have occurred over the past two years, reflecting significant growth and evolving market dynamics across different regions.

1. Market Expansion and Adoption

Europe remains the leader in open banking, driven by regulatory frameworks like PSD2 which mandate banks to open their data to third-party providers with customer consent. This has led to a surge in registered third-party providers, indicating robust growth in this sector​ (Image Source).

 

Pace of adoption open banking by McKinsey

2. Innovative Partnerships

Companies such as Volt have significantly extended their market presence through strategic alliances, notably securing a position as Shopify's approved open banking partner. In a similar vein, Plaid has collaborated with Microsoft to integrate its financial data connectivity services into Microsoft Excel, enhancing data management capabilities. TrueLayer has also entered into a strategic partnership with Revolut, aiming to improve banking data integration throughout Europe. Additionally, Tink has allied with PayPal to bolster PayPal’s payment processing and user experience enhancements across the European market. These partnerships exemplify how collaborations in the fintech sector are driving expansion and innovation.

At Thinslices, we developed strategic partnerships to leverage our fintech development expertise within the open banking sector. Our collaboration with Solarisbank is focused on creating robust banking solutions, notably, an innovative banking platform tailored to meet diverse customer needs efficiently. Additionally, our partnership with AAZZUR integrates mobile banking services seamlessly, enabling a unified platform that allows users to manage various bank accounts and financial services. These partnerships enhance our capabilities in delivering advanced, customer-centric financial solutions.

3. Technological Advancements

The integration of technologies like natural language processing in banking is becoming commonplace, enhancing customer interaction through chatbots and virtual assistants, which are increasingly used across global banking sectors to improve customer service and operational efficiency​.

In Ivory, our in-house fintech product, we've integrated advanced AI features that further enhance the mobile app development process. These AI capabilities allow for smarter automation of development tasks, making the software more intuitive and efficient at adapting to specific project needs. This results in faster delivery times and improved app performance, enabling us to focus on crafting more personalized and engaging user experiences.

4. Consumer Preferences and Behaviors

Fintech applications have seen a significant uptake, with a considerable portion of consumers, particularly Millennials and Gen Z, preferring to manage their finances through digital tools. This demographic is particularly open to innovative payment methods like pay-by-bank options, indicating a readiness for more integrated financial solutions.

Additionally, there's a growing trend towards subscription-based financial services and direct-to-consumer (D2C) approaches. Many consumers have shown a willingness to subscribe to various services, with convenience and cost-effectiveness being major drivers. This trend highlights a broader consumer shift towards personalized and accessible financial services, facilitated by open banking platforms.

5. Product Innovations and Regulatory Advances

Companies continue to innovate with products that facilitate easier and more secure open banking transactions. For example, Volt launched one-click PayTo payments in Australia, allowing for highly secure, fast transactions for returning customers. They also received a UK EMI license, enabling them to issue virtual accounts directly, which marks a significant regulatory milestone​.

Commercial models used in open banking

Open banking has fostered various commercial models that leverage the increased accessibility to financial data. These models can be broadly categorized into two main types: customer-facing propositions and infrastructure services.

Here’s a brief overview of each:

1. Customer-Facing Propositions

These services directly interact with end-users by offering enhanced financial management tools and personalized financial services. Examples include:

  • Personal Financial Management Apps: These apps help users manage their finances by aggregating data from various accounts, offering budgeting help, and identifying saving opportunities. For instance, Money Dashboard aggregates customer accounts to run their budgeting and provides anonymized consumer spending insights to third parties.
  • Enhanced Credit Scoring Services: Services like Credit Kudos use open banking data to improve affordability assessments and risk evaluations for lenders, potentially offering more accurate credit scoring.
  • Investment and Savings Platforms: Companies like Moneybox automate the process of investing spare change and provide a comprehensive view of customers' wealth.

2. Infrastructure Providers


These companies provide the technological backbone that enables other businesses to offer open banking services without building the infrastructure from scratch.
  • API Management: Companies like Plaid and Tink provide APIs that other companies can use to access financial data securely and efficiently. This allows businesses to create their own financial services products that leverage real-time data access.

  • Payment Solutions: Services like GoCardless have developed payment systems that allow for direct bank payments, reducing transaction costs and streamlining the payment process. As a leading Payment as a Service (PaaS) and BIN provider, Enfuce offers comprehensive payment processing solutions that allow businesses to launch and manage card programs efficiently.

  • Banking as a Service (BaaS): This model allows non-banks to offer banking services under their brand. Firms provide the regulatory and technological framework, enabling companies to integrate financial services into their offerings.

  • Core banking platforms: For example, Tuum (formerly Modularbank) is a core banking platform that enables businesses to quickly create tailored financial products. Saascada also provides a core banking platform, focusing on cloud-native solutions that support scalability and rapid deployment for financial services.

Choosing the right commercial model for open banking is crucial because it directly impacts the viability and sustainability of financial services innovations. For startups, the correct model can mean the difference between gaining a competitive edge or struggling to find market relevance. The implications include attracting investment, fostering user adoption, and establishing profitable operations. 

The success of these models relies heavily on aligning with business objectives and keeping pace with technological evolution. They must adapt to regulatory changes, technological advancements, and shifts in consumer behavior. Failure to do so can impede a startup's ability to adapt and scale in a rapidly evolving financial ecosystem.

Identifying the right commercial model for open banking

A sustainable commercial model for open banking is essential for long-term viability, building trust among consumers and financial institutions alike. It remains flexible to adapt to regulatory changes, ensuring compliance and competitiveness, thereby boosting investor confidence by showcasing a stable business environment.

As financial technologies continue to evolve, a sustainable model promotes innovation and adaptability, aligning with business objectives and technological progress—key for startups' strategic direction and operational efficiency in the open banking ecosystem.

However, challenges persist in pinpointing the optimal model, such as:

  • Regulatory Uncertainty: Regulations continue to evolve, creating uncertainty around what is permissible and how open banking should be implemented.
  • Banks vs. Fintechs: Banks and fintechs often have conflicting interests, which can complicate the development of a model that benefits all parties.
  • Monetization: Determining how to monetize open banking services while maintaining customer trust and compliance with data protection laws is complex.
  • Technical Integration: Developing the necessary infrastructure to support secure and efficient data sharing between diverse systems can be technically challenging.
  • Consumer Trust: Gaining consumer trust to use open banking services is crucial, requiring clear value propositions and robust security measures.

As the open banking landscape continues to evolve, its adoption rate and integration into existing financial systems pose strategic challenges that demand innovative solutions. The transition toward open banking necessitates a deep understanding of market dynamics and regulatory frameworks, especially considering the rapid technological advancements in financial services. Addressing these challenges involves fostering collaboration between banks and fintechs to create mutually beneficial solutions, while also navigating the complexities of data privacy and security.

To ensure sustainability, companies must focus on developing robust commercial models that prioritize customer trust and regulatory compliance. Looking ahead, the focus will likely shift towards more seamless integrations and innovative offerings that leverage open banking capabilities to deliver enhanced customer experiences and operational efficiencies. This strategic approach will not only help in overcoming current hurdles but also in harnessing the full potential of open banking for future growth and innovation.

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