Both regulatory and market driven open banking has become an innovation catalyst, significantly impacting forward-thinking banks, a diverse range of B2C fintechs, national tax offices, corporates, climate tech companies, and the rent market. Since its emergence in the mid-2010s, the scope of data sharing between financial institutions and third-party service providers via APIs has expanded from primary account aggregation to complete digital identification journeys and personal financial management that support current and future decisions. Moreover, from a payments perspective, open banking is increasingly seen as a cost-effective method by businesses, merchants, and corporates, with open banking payments growing by 10% month-on-month in the UK.
While the growth of open banking offers lower costs, more competition, and improved products and services, which are central to regulatory-driven open banking initiatives, two elephants in the room remain for those building open banking-powered products: Do enough consumers and businesses use open banking, and how can the right incentives be provided to overcome data privacy concerns and change payment behavior? Before addressing the challenges, it is worth highlighting five emerging use cases of open banking.
Use Case 1: Fuelling the Climate Tech Space
Open Banking is powering the clean / climate tech space through the aggregation and access to transaction data. Consumer and business customers who are conscious of the environmental impact of their daily spending use these platforms by sharing their transaction data via APIs, which are then passed through a provider such as Doconomy, which allocates a CO2 footprint for each transaction via the Aland Index. Over 90 financial institutions across 40 countries.
Using customer transaction data to quantify an individual’s carbon footprint is the first step and often the foundational service for many clean / climate techs. For example, Greener for Business provides SMEs a tailored climate action plan and exclusive offers on top of Business Carbon Footprint Management (BCFM). Climate Savers saves individuals money by rewarding them with cashback and when they buy from sustainable brands. Many consumers have the concern that whatever sacrifices they make, it will have no impact in the wider world. It does this by linking green transactions with social using leaderboard gamification. It also gamifies the experience by offering a country and company leaderboard.
Use Case 2: Passporting transaction data for digital identity workflows
Open banking and identity go hand-in-hand, and there are increasing use cases for banks looking to improve back-office processes, for fintechs looking to reimagine the creditworthiness of an individual or to prove the age of individuals on e-commerce websites. bunq and Wise are two European neo-banks using either open banking, or similar third-party technology, to fulfill KYC and proof of identity for their existing customers.
bunq offers an alternative to SMS authentication via an SMS with a top-up authentication. With third-party provider SOFORT, bunq customers confirm an account information access request and complete a SEPA transfer of €0.10. A SEPA transfer and account access fulfill bunq’s customer authentication requirements and grant users access to their bunq account. In this instance, the user was outside of Europe and did not have access to their European mobile phone number, so this alternative authentication proved to be a significant time saver for the user and for bunq to demonstrate how to execute a fully digital identification workflow. As a neobank for digital nomads, bunq wants their users to have access to their funds, wherever they travel. Bianca Zwart, bunq’s Chief of Staff commented, “Our primary focus is always on our users. We’re building a global neobank for digital nomads who want to have secure access to their bank account, no matter where they are. Open Banking is one of the ways in which we can offer them a smooth experience.”
Use Case 3: Creating new propositions in PropTech
Several PropTech firms are using open banking to help landlords better assess the risk of a potential renter, overcoming some of the constraints with traditional credit bureaus, namely the lack of detail and history a traditional credit score holds. Renters can share their transaction data with the PropTech firms, which can identify when and how much the renter is paid monthly, their past rental payment history, and create an improved risk assessment for landlords via rental scores.
One example of a PropTech is Canopy, which helps renters build credit, save money, improve rental affordability, and achieve financial freedom. Users can easily share their income history via open banking. Another PropTech, HomeQ (recently acquired by Schibsted) is a Swedish property services company specializing in selling property. The company offers an optimized, transparent, and customer-centric sales process, using technology and digital marketing strategies to reach potential buyers. HomeQ is using open banking to improve and streamline the process of verifying the income of rental property applicants. By obtaining access to the account information of a potential renter, it is easier to analyze financial situations quickly and more accurately.
Use Case 4: Cheaper, Faster, Safer Payments
Account to Account(A2A ) or Pay By Bank, is increasingly seeing open banking technology applied to the journeys. In these situations, a payment initiation service provider (PISP) sends information between the merchant and the bank using APIs to initiate a bank transfer. A2A is attractive to merchants and SMEs as it is a less costly option than accepting cards and less susceptible to fraud and chargebacks.
In 2022, A2A accounted for nine percent of global e-commerce payment transactions, and in Europe, pay-by-bank represented 18% of e-commerce transactions in 2022. Pay by Bank is increasingly being adopted by enterprises, large businesses, and government agencies to reduce costs. Kazoo, an automobile marketplace, offers A2A as a payment method, with one in four shoppers using the payment method, while HMRC partners with Ecospend (Trustly) to offer open banking-powered A2A payments to pay income tax. HMRC reported a 16% increase in open banking A2A payments from 2023 to 2024. Meanwhile, JJ FoodServices has launched open banking powered Pay by Bank to replace credit card payments, mitigating the fees associated with acceptance.
Open banking powered A2A is also gaining traction in the pension space. Penfold is an entirely digital pension management platform in the UK and partners with TrueLayer to offer pay-by-bank to obtain operational efficiencies and create a better customer experience. According to Penfold, 25% of their customers use Pay by Bank.
Francesco Simoneschi, CEO, TrueLayer explained, “one of the key advantages of open banking for merchants is the reduction of intermediaries in the payment chain. Traditional card rails, originally designed for face-to-face payments, are retrofitted for ecommerce, necessitating multiple intermediaries to make this transition work. These intermediaries add complexity and costs for merchants, which ultimately affect the consumer experience at checkout. By facilitating account-to-account payments, open banking payments networks like TrueLayer remove these unnecessary middlemen and associated fees, offering merchants a more direct and efficient payment solution.’’
From 2018 to around 2022, open banking-powered PFM was characterized by insights that looked to past spending rather than focusing on helping customers make current or future decisions with their money management. However, we are increasingly shifting to PFM 2.0, where transaction data goes beyond “what happened in the past” to support real-time financial decisions. In 2023, Apple
Apple
announced it was using open banking to provide account balance information for those cards held within the Apple Wallet.
Dobin is a PFM app in Singapore that empowers customers through insights based on their transaction history. In addition to basic PFM, it will soon use transaction data to recommend the right credit cards for users to maximize rewards and create an anonymous credit profile based on past transactions.
Beforepay, an Australian fintech, uses account aggregation via open APIs powered by Basiq to “detect pay schedules and expenses.” Once a user connects their bank account, Beforepay analyses the transaction history to determine when a user gets paid and what they spend. If they need a payday “advance,” they simply indicate how much they need, with a maximum of $2000 of the user’s wages. The user pays a 5% fixed transaction fee and can repay the amount in up to four pay cycles.
Can The Next Unicorn Rely Solely on Open Banking?
While the use cases for open banking continue to expand and the number of startups leveraging this technology grows, founders and builders need to exercise caution. A recent report by Statista indicates that open banking will reach 64 million users in Europe by 2024, a 400% increase in just four years. The headline number looks promising, but 64 million users are only about 8.5% of the population, which begs the question: Are consumers truly utilizing open banking?
Making open banking appealing to a broader audience involves overcoming hurdles, the largest of which are data privacy concerns. Sharing financial data can be alien and counterintuitive to many users, challenging their instincts and the warnings traditionally issued by banks about phishing scams. Incentives and education are thus pivotal and the benefit of sharing the data must be greater than any perceived risk by the consumer. There is also the challenge of breaking habits. In markets like the U.S., consumers are accustomed to rewards such as cashback and points, which are becoming deeply ingrained in their payment behavior. Breaking this habit needs to be done with deep financial or value-based incentives. Alternatively, players can use open banking to play to these habits, which we see with Dobin, where the average number of cards per person is 3.3, the highest in Southeast Asia.
Looking Ahead: Building Trust and Value in Open Banking
As the industry evolves, building trust through clear communication about data privacy and security and demonstrating the tangible benefits of open banking will be critical. Ensuring that incentives align with consumer expectations and needs will enhance current adoption rates and pave the way for future innovations within the open banking ecosystem. For players in the emerging use cases, the following must be considered:
- Climate Tech: Customers may hesitate to engage with climate tech services due to concerns over data privacy and the uncertainty of actionable outcomes. To encourage usage, providers could assure customers that there is value in exchanging their data by not only showing ‘what’s in it for them’ as individuals but ‘what’s in it’ for society at large.
- Identification: Consumers may hesitant to share their data with third-party identification services. An effective incentive could be to demonstrate the security measures in place and the benefits of streamlined verification processes, which can enhance user experience across various platforms.
- PropTech Like other sectors, data privacy concerns are prevalent in the rental market. Potential tenants might be more willing to use open banking solutions if they can see that trusted landlords are already users of the platform, thus proving the platforms reliability and security.
- Pay By Bank: Many consumers prefer traditional payment methods like debit and credit cards due to the perks such as points and cashback. To shift behavior, open banking platforms could offer comparable or superior loyalty rewards and cost savings to shift behavior, passed on from merchants to customers. Additionally, educating consumers about the enhanced security measures can help alleviate data security concerns.
- PFM 2.0 (Personal Financial Management): Concerns about data privacy also affect the adoption of next-generation personal financial management tools. To overcome this barrier, providing users with access to innovative PFM tools that offer enhanced savings and investment products could be a compelling incentive, and is a trend we already see with a number of US-based micro-savings and investment solutions.
By focusing on these strategies, providers can ensure that open banking does not remain a niche offering but becomes a mainstream financial solution that offers enhanced value to all users.
