The world of finance, particularly banking, has undergone tremendous changes over the past decade due to the increased adoption of technology, which has significantly disrupted the interactions between banks and consumers. Online banking and hyper-personalized apps are constantly being introduced to the public to build brand loyalty, help banks maintain a competitive advantage, increase revenue, and improve customer satisfaction.

According to the Global Opportunity Analysis and Industry Forecast report, the global online banking market size was valued at $11.43 billion in 2019 and is projected to reach $31.81 billion by 2027. This rapid growth can partly be sustained through open banking initiatives that allow third-party FinTechs to access consumer data directly from banks and non-bank financial institutions. At the same time, introducing data protection laws and regulations to ensure that financial institutions are held accountable for using personal data has set the bar of open banking adoption very high.

This article will look at the current state of open banking, examine some of the concerns and hesitations surrounding its adoption, and consider what measures need to be taken to facilitate its future.

Open Banking and Security

Given the nature of the sensitive data and information exchanged in open banking, the question of security naturally comes into focus. Security is a major concern for both financial institutions and consumers, and no discussion can take place regarding the future of open banking without taking this into account. In a report published by Curity, Facilitating the Future of Open Finance, over 71% of the 200 financial institutions surveyed expressed that security-related issues are paramount in open banking adoption. In particular, financial institutions were concerned about the lack of modern systems within their organization that comply with the requirements of securely sharing sensitive information. Furthermore, regulation and data protection are essential since laws have been introduced to safeguard user data privacy. Some examples of these regulations include the European Payment Services Directive (PSD2) and Open Banking Brazil.

In addition to these regulations, some open banking mandates require adopting financial-grade security protocols. These standards ensure that financial institutions can enhance security and meet customer demands for greater access to data and financial services. As such, financial institutions must make sure that financial information is protected and that APIs are strongly secured. The question of security comes again into focus when discussing open banking and consumer adoption. Without consumer adoption, there can't be a future for open banking.

Financial institutions have to take into consideration the data privacy concerns that consumers may have and educate them on the benefits of open banking. Consumers need to feel confident that the solutions and services offered can be trusted and that their financial information is always strongly protected. One way to facilitate this is by adopting strong authentication methods. Securely embedding data in tokens and enabling robust authorization using the standards from the OAuth family are some of the steps that financial institutions can take to ensure the highest level of security for customer data.

Watch the FMLS22 session where the panel discuss Challenger Banks, the challenges and opportunities ahead.

The Role of Executive Leadership

Another vital key to the future success of open banking is executive leadership. Nowadays, 10 – 11% of digitally-enabled consumers are estimated to be active users of at least one open banking service. Even though open banking adoption has continued to grow, we're still far from mass adoption. For this to happen, business decisions supported by data and evidence by executive leadership will be equally, if not more, important than ever. Without leaders within financial institutions investing in technology and innovation, adoption will fall at the first hurdle.

Leaders in larger organizations have the opportunity to establish industry bodies that monitor the enforcement of open banking, paving the way and setting an example for smaller organizations. Curity's research highlighted that, of the UK-based financial institutions surveyed, 48% believed that an industry body is needed to ensure that standards are met. In addition, investments by executive leadership in the appropriate technologies and training staff are paramount in sustaining the growth of open banking adoption. According to Curity's research, more than 90% of those surveyed agreed that executives should invest in the following:

Security tools and infrastructure
Customer experience (smooth and seamless interactions between apps and users)
Consumer education
Industry bodies that ensure regulations are followed
Adoption from the larger businesses

The Future of Open Banking

Open banking has already made a remarkable impact on the financial industry and still has vast potential to continue to be a transformative force. At the same time, this change will not happen on its own. To ensure its continued success and development, there must be the same focus and enthusiasm that drove the initial growth, both from financial institutions and consumers.

Lastly, open banking stakeholders must continue investing in improving customer experience, strengthening API security, and meeting regulatory demands that protect customer data privacy. As a result, these actions will instil trust and facilitate consumer adoption, which is the basis of long-term open banking success.

Maria Pelagia is a Digital Marketing Specialist at Curity