Insights

Banks hold a record of much of what we spend, save, and borrow—from electricity bills and mortgage payments to our weekly spend on fuel and coffee. Now, some of that customer data is being shared with third parties in a global movement known as “open financial data” (sometimes referred to as “open banking.”) Roughly half a decade in the making, it’s unlocking a wave of digital financial innovation—and likely disruption.

Brought on by a combination of government regulation and market forces, open financial data allows an expanding universe of players—both financial and non-financial—to access customer accounts and data in order to offer new products and services (all contingent on customer consent) (Exhibit 1). For customers, open financial data affords greater flexibility in how their money is managed, allowing, for instance, better visibility of accounts and more convenient access to payments. (This paper focuses primarily on benefits for consumers; for more detail on benefits for all participants, including financial institutions, see our recent related report, “Financial data unbound: The value of open data for individuals and institutions.”1 ) Still in its infancy, the movement has the potential to reshape everything from bank accounts, credit cards, payments, mortgages, small business loans, and even insurance policies.

Around the world, this trend is evolving in different ways. In the European Union, the United Kingdom, South Korea, Australia, and India, governments have mandated large banks to open up their vast troves of customer accounts to other companies, in a bid to stimulate competition (Exhibit 2). In the United States and China, it is a market-led movement, with companies establishing open-banking relationships among themselves. Singapore is using a blend of the two models.

In 2016, European Union regulators first pushed to create open financial data, laying the foundation for market development. This sweeping piece of EU legislation (known as the second Payment Services Directive, or PSD2) also spurred the UK’s Competition and Market Authority (CMA) to mandate the development of an “open-banking standard” by the country’s nine biggest banks to share customer and transaction data with third parties. As of December 2020, the UK had issued some 200 third-party provider (TPP) licenses for open-banking APIs, or application programming interfaces—shortcuts that make it easier for software developers to build new applications. EU countries, which were initially less directive about API specifications for developers, have not issued licenses at the same pace (Exhibit 3). However, the Berlin Group, a consortium of 40 banks and other companies from across the EU, is creating a common API standard called NextGenPSD2.

The adoption of new digital habits and a dramatic movement toward online channels during the pandemic appears to have accelerated open banking. With so much more of their lives spent online, both consumers and small and medium-sized enterprises (SMEs) became much more open to fintech apps and other non-traditional financial products and services. They also habituated to greater levels of convenience, choice, and flexibility in their financial relationships. In just the first six months of 2020, the number of users of open banking–enabled apps or products in the UK doubled from one million to two million2 and grew to over three million as of February 2021. In the US, almost one in two consumers now use a fintech solution, primarily peer-to-peer payment solutions and non-bank money transfers.3

Open financial data could put powerful non-bank companies in a stronger position to become financial-services players. With digital adoption leaping ahead by years in just several months,4 many ecommerce, tech, and social-media companies have accumulated a massive lead in customer attention. 

This opens the possibility for them to be the first port of call for new financial products and services to their user bases, similar to what Google now enables customers to do with its “Plex” product, connected to the Google Pay app. According to the Google web site, Plex is offered in partnership with 11 banks and credit unions and includes physical and virtual debit cards, peer-to-peer payments, and an associated checking account. In Singapore, the government recently issued banking licenses to five nonbanking players, including the consumer ecosystem Grab (200 million users in eight countries) and the consumer internet company Sea. The surge in online activity and digital behaviors has also opened up new avenues for companies to integrate financial services directly into customers’ daily activities, such as online shopping and the management of payments related to cars.

We believe that if open finance continues to accelerate it could reshape the global financial services ecosystem, change the very idea of banking, and increase pressure on incumbent banks. According to the UK’s Financial Conduct Authority, a significant share of customers who are dissatisfied with their current accounts, earn uncompetitive interest rates on savings accounts, or pay higher mortgage rates do not change providers due to the hassle of switching or lack of visibility into better options.5 The ability for customers to better understand their full financial picture—one of open banking’s promises—could result in margin compression, as pricing and charges become more transparent. Banks may also have to contend with margin sharing, as payouts to digital platforms could play a far greater role in customer acquisition.

At the moment, however, the open-finance landscape remains in flux, with the real winners and losers far from determined. In a number of countries, fintechs are actively pursuing this opportunity, vying for the same customers and funding.6 Ultimately, not all of them can win. At the same time, incumbent banks are likely to continue to be a meaningful part of the ecosystem, even without the direct customer relationship. It will be imperative to understand and respond to these changes, reimagine offerings, adjust business models, and forge successful partnerships with fintechs or tech companies, to ensure continued success and relevance.

In this article, we explore the state of open banking around the world, with a particular focus on the UK, where these changes have had longer to play out. We also take a deep dive into the open-banking ecosystem, looking at the types of new products and services emerging, and share the results of McKinsey customer-sentiment surveys on attitudes toward these offerings. Finally, we lay out questions banks, fintechs, and non-finance players need to ask themselves in the changing landscape.