Open banking regulations and its opportunities and risks in the new normal


For many years, as digital technologies started to become mainstream in the banking industry, bankers and economists have predicted a future without traditional location-based banking: A future where all banking services can be accessed through any device and at any time.

Today, that future is almost here and customers have been moving away from traditional banking in recent years; the pandemic and subsequent global lockdowns have accelerated this decline. 

Today, spurred on by the challenges brought about by the COVID-19 pandemic, banks and other financial institutions across the world are adopting digital service delivery methods to serve their customers and open banking technologies are at the forefront of this systematic shift.

Brought to the mainstream by the regulations like PSD2 and its derivatives across the EU and the UK, open banking technologies have bridged the gap between banks, customers, regulators, and technology service providers, leading to an integrated banking environment that is more efficient and secure than ever before.

In this post, we explore how these regulations impact the banking industry, the opportunities they present to banks, and the risks associated with the widespread adoption of technologies derived from these regulations.


How open banking regulations impact the banking industry

When PSD1 was introduced in 2007, it was the first regulation of its kind. Since then, the regulation has been preceded by PSD2 and other regional derivatives across the world.

The main objective of these regulations is to open up the banking systems to third-party financial service providers, giving them access to customer data like credit card details, financial details, and other transaction information to facilitate the development of faster, robust, and more diverse banking services.

Today, these regulations have encouraged the rise of FinTech solutions that challenge established banks, pushing the industry towards digitalisation.


What are the opportunities for open banking?

The digital transformation of the banking sector

For the longest time, the banking industry has relied on the same fundamental principles that were established over centuries ago. Even the physical layout of banks has followed the same counter system for the better part of two centuries.

With integrated banking technologies, however, banks can move away from these systems and position themselves as community hubs for customers, and most banks have already started to realign their processes to become more digital and customer-centric.


Increased integration between financial institutions

Traditionally, banks and other financial institutions have operated in a siloed environment with limited integration between each other and regulatory systems. This resulted in a fragmented banking environment, making it difficult to conduct interbank transactions.

The increased access to financial data across the industry, however, has paved the way for tighter integration between banks, regulators, and technology providers. 

Today, customers can monitor and handle transactions with one centralised system, regardless of their bank or technology provider.


Reduced operational costs

The digital transformation of the banking industry has helped banks automate certain aspects of their operations, like opening and closing of accounts, customer interaction, fraud detection methods, and financial compliance, allowing banks to cut down on labour-intensive processes and expenses.


What are the associated risks?

Privacy concerns

Although digital technologies are safer and more efficient than traditional banking services, they still possess certain vulnerabilities, the primary being cybersecurity threats. 

If banks and FinTech providers fail to implement robust security measures across their apps, they can expose sensitive financial data to cybercriminals. This has led to heightened privacy concerns among users of these services.


The lack of knowledge among consumers

One of the primary obstacles to the mainstream adoption of these technologies is the lack of knowledge among customers. Older customers, especially, still prefer traditional branch-based banking systems due to concerns about digital services.

Banks and other financial institutions have to invest resources in educating customers on the benefits and opportunities associated with this technology, therefore, to create the impetus for widespread adoption.


The future of the banking industry is here

We are living in a world that is increasingly becoming digital-centric, and banking is no exception to this digital transformation. 

Open banking regulations and technologies have aided this digital transformation in recent years and are playing one of the most significant roles in creating the banks of the future.

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