NatWest Identifies Three Ways to Maximize Open Banking’s Potential

NatWest Group, a British banking and insurance holding company, has commissioned Oxera, an economics and finance consultancy firm, to examine the challenges that are hindering the full potential of open banking, writes Francis Bignell for The FinTech Times. In their report titled «The (Unmet) Potential of Open Banking,» they also explore new innovative use cases that go beyond the regulatory requirements.

Although open banking has been somewhat successful since its launch in 2018, with over seven million businesses and consumers currently using it, this represents only about 10 percent of consumers and SMEs. Open banking payments are significantly overshadowed by more traditional options like cards or direct debits.

The report highlights several economic challenges that impede the realization of open banking’s full potential. These challenges include a lack of commercial incentives for the development and enhancement of APIs and a lack of alignment among Account Servicing Payment Service Providers (ASPSPs), which are banks, regarding the benefits of open banking. There are also significant challenges in managing trade-offs between security and convenience within the open banking ecosystem.

To address these challenges, the report suggests three possible routes. The first two options are already being discussed. The first option proposes mandating banks to offer a wider range of use cases, expanding the scope of open banking and requiring banks to provide the necessary data through APIs for free. The second option is to encourage banks to expand open banking use cases through commercialized APIs. The report introduces an additional third option, which is to enable the emergence of multi-party systems with commercial incentives to grow the open banking ecosystem through the development of new, flexible frameworks for industry collaboration.

The report emphasizes that the optimal route may vary depending on the specific use cases of open banking. Some use cases may benefit from hybrid approaches, such as mandating API development while leaving commercialization to the banks themselves or a multi-party system.

Claire Melling, the head of bank of APIs at NatWest Group, emphasizes the need for collaboration between banks, fintechs, and regulators to design flexible frameworks and commercial incentives that support a wider range of open banking use cases. By implementing the recommendations in the report, the full potential of open banking can be realized, resulting in new and enhanced propositions that improve customer choice and experience.

Nima Montazeri, the chief product officer at Liberis, an embedded finance platform, adds that open banking has the potential to provide rapid access to funding and benefit customers when they need it most. Partnerships between fintechs and traditional banks have grown significantly, and the adoption of open banking technology is revolutionizing the finance industry.

Mandating banks to offer a wider range of use cases through free APIs and commercialized premium APIs can streamline the financial experience for customers and generate additional revenue streams for banks. Additionally, enabling multi-party systems through flexible and collaborative frameworks can drive the growth of the open banking ecosystem and foster greater innovation.