Open banking concerns may hinder global adoption

This is an excerpt from a story delivered exclusively to Business Insider Intelligence Fintech Briefing subscribers.
To receive the full story plus other insights each morning, click here.

Open banking developments are spreading across countries, and while the UK is arguably the most advanced in legislating open banking, other countries, including Australia, are following suit.

Business Insider Intelligence

And banks are beginning to identify how to monetize this global movement: Most banks (60%) and fintechs (70%) think that a revenue-sharing model, meaning that the API provider and user share generated revenue, is the most suitable option, according to a new report from Capgemini and Efma.

Here’s what it means: While having a monetization strategy is a good start, there are still several obstacles that both banks and fintechs will have to overcome for open banking to be successful.

Banks are particularly concerned about data security and customer privacy when it comes to adopting open banking. Seventy-six percent of banks see data security and customer privacy as a concern regarding open banking adoption, while 50% of fintech respondents say the same. Banks are likely more concerned about these issues because they can be held liable if a breach occurs, which could result in hefty fines and a loss of customer trust. The US has defined open banking protection regulation as banks being liable for any data breaches during collaborative efforts, which might deter banks from sharing data with third parties, while the EU’s General Data Protection Regulation (GDPR) can lead to a similar concern in Europe, per the report.
When it comes to collaborations between fintechs and banks, there are both cultural and technical barriers. Differences in organizational culture and mindset are a barrier cited by 66% of banks and 70% of fintechs. However, while 70% of fintechs think process barriers are an issue, only 52% of banks agree. Additionally, over half of bank and fintech respondents see problems with IT incompatibility between banks’ legacy systems and fintechs’ IT systems. To make open banking partnerships work between these players, there’s seemingly a lot more work to be done in both the cultural and technical departments.
Fintechs are miles ahead of banks when it comes to open banking preparedness — but both still have a way to go. Just over half of banks are compliant with regulations related to open banking, compared with 63% of fintechs. Additionally, only 33% of banks have adequate security measures in place, while just 26% have identified the right open banking partner, compared with 68% and 43% of fintechs, respectively. This difference can probably be attributed to fintechs and banks having different priorities when it comes to open banking: Fintechs likely see it as more of an opportunity because they’re gaining access to data, while banks have to provide the data. However, as open banking gains traction, it would be wise of banks to shift their focus to how they can best leverage the new developments.

The bigger picture: Open banking is still a relatively new development, and it will likely take longer to see it truly transform the finance space.

As of yet, the success stories related to open banking are still limited. However, with the final PSD2 deadline in the EU coming up in September, we’ll likely see more open banking partnerships and developments cropping up in the region. Additionally, some fast-moving players in other countries, like BBVA, which set up its open banking platform in the US ahead of all other incumbent players, can likely get a competitive edge.

Being an early adopter of open banking in markets that have yet to announce regulations can help incumbents ensure all their APIs are running smoothly before open banking becomes a necessity. And, as fintechs continue to struggle to scale, they’ll likely be keen to form open banking partnerships with banks, which should help further accelerate open banking adoption in the future.

Interested in getting the full story? Here are two ways to get access:

1. Sign up for the Fintech Briefing to get it delivered to your inbox 6x a week. >> Get Started

2. Subscribe to a Premium pass to Business Insider Intelligence and gain immediate access to the Fintech Briefing, plus more than 250 other expertly researched reports. As an added bonus, you’ll also gain access to all future reports and daily newsletters to ensure you stay ahead of the curve and benefit personally and professionally. >> Learn More Now