The financial sector is constantly evolving. It’s now easier and more secure to move money around and it all relies on the ability of the financial services industry to adapt to the market and new technology.
We’ve already experienced a major shift in the way we interact with our money with everything from digital and mobile banking services.
Open banking is the next evolution, and in this article, we’ll cover 5 ways that open banking is shifting the financial industry into new directions for you as a consumer.
What is open banking?
Open banking is a financial services industry term that spawned after the European Parliament launched new rules in 2015 that recommended that banks allow third-party payment service providers (TPP) to access account data and initiate payments.
While the EU piloted the concept, this connection paved the way for many U.S.-based consumer-facing financial services to evolve, including Link Money, which allows consumers to pay for products and services directly through their bank accounts at the checkout quickly, easily, and securely.
What is the role of the financial services industry?
The financial services industry plays a crucial role in the global economy by providing various products and services such as banking, investment, insurance, and payment processing to help individuals and businesses manage their financial resources.
Everything from financial planning, saving, personal finance, investing, loans, and asset management is covered in the financial services sector.
This industry also plays a vital role in facilitating economic growth by providing the necessary financing for a business to invest, expand, and ultimately contribute back to the economy.
5 ways open banking is changing financial services around the world
1. Keeping finances simple
We all love simplicity in some form or other. That goes without saying when it comes to making a payment. We want to pay for our products and services as easily and securely as possible and in some cases having to think about money can impact our mental health.
Traditionally, the financial services industry has been complex, money management can be laborious, and making a payment can feel time-consuming. For example, paying by cash takes extra time to count by both you and the cashier.
Paying online is done in a few clicks, however, there is still a layer of complexity. You may have to find your credit or debit cards, enter long numbers, and update your info every time your card is lost, stolen, or expires.
With open banking payment services, the seamless transition from shopping to payment is fast and secure, with no card details or extra data entry required. You can pay from an account you know and trust without extra complicated authentication.
The simplicity goes a few steps further when considering applications. Open banking allows you to access a wide range of financial services and products through a single platform, rather than having to navigate multiple apps and websites.
This saves customers time and makes it simple for you to manage finances and get a more accurate picture of what you’re spending.
2. Faster than old technology
Open banking technology allows for real-time payments and can show settled funds in a bank account faster or on the very same day you make the purchase. Data can also travel faster and speed up the process of showing an updated bank account balance and information.
Accessing an account or multiple accounts is faster as there isn’t the need for multiple usernames and passwords you probably won’t remember. Managing these bank accounts and keeping track of any fraudulent activity is much faster due to the real-time nature of the connections.
If you’re in the need of credit at some point, lenders can gather a detailed picture of your financial history much faster using opening banking technology which can speed up their assessment to approve personal loans.
Wealth management is faster and easier for financial advisors to give more accurate tax advice, wealth management, and more data-driven tax and accounting services using open banking connections.
3. Safe and trustworthy
Payments through open banking technologies remove the need for manual entry of card or account details when you make an authorized payment.
The security checks are done with bank-level security technology to verify that you are who you say they are, such as a fingerprint you may use to unlock your phone.
The risk level for fraudulent transactions and hackers may be significantly reduced as there is nothing to intercept, steal or leak that could lead to unauthorized payments.
Along with less risk of your data getting into the wrong hands, there is greater transparency around how your sensitive and personal data is handled by the banks. This feels more trustworthy with the banks having to follow strict data protection and security standards and puts you in control of who they share your data with.
As mentioned with the speed of open banking connections this enhancement of real-time connections reduces the time between fraudulent activity in your account, and you finding out about it. The banks can speed up the process of detection, and try to prevent these moments quickly and more effectively next time.
4. Flexible for a variety of business models
New data from 2022 suggests that Americans are carrying $925 billion in credit card debt, which is over $5k per person. The flexibility of other financial services allows you as a consumer to buy the way that’s best for you, without adding additional debt or incurring fees or interest and extra financial stress.
A business that invests in open banking technology gives them more flexibility with their payment options at the checkout as you may use one of your bank accounts to make the payment quickly and easily.
This new technology also gives your favorite subscription companies like Netflix or Amazon Prime the flexibility to build banking payment options in their business model to keep the subscription rolling. Bank accounts don’t expire, but most credit cards expire every three years.
There is also room for new Fintech companies to enter the market and innovative businesses jumping on board to use the technology to compete with traditional financial institutions in the financial services sector.
5. More advanced and personal products and services
One of the most exciting parts of the open banking financial services industry revolution is the innovation that makes your experiences as a consumer better. This technology opens the door for new concepts and ideas for a company to make their customers' lives easier when interacting with finances.
For example, as mentioned before, applications that allow you to see all your financial services that are linked to a bank account under one app. Which removes the need to have multiple apps on your phone just to glance at your finances.
There are more open doors to use this technology for a business to improve their existing products and services as well as create enhanced personalization for you as a consumer. You’ll find what you’re looking for, get more accurate suggestions, and be able to get it quicker and easier.
Algorithms are used in many digital products and services and the more information they gather the more accurate they can become. Open banking can give this information in real-time for the algorithms to learn from to create predictions of cash flow for accurate credit scoring, or tailored solutions, such as personal loans or credit lines.
We can expect to see much more automation such as automating account management activities to make it easier for you to stay on top of your finances and make tax preparation much faster. You can create budgets, plan for your financial future and get recommendations based on your actual spending patterns and income.
The future isn’t all that far away
We’re already experiencing the best of this revolution in the financial services sector in so many forms and it’s improving our day-to-day living conditions in subtle ways that we don’t even realize.
From paying with a simple tap of your phone, or seamlessly paying with your bank account with products like Link Money - Pay by Bank, it’s an exciting place for us as an early open banking innovator in the U.S. to build new products for companies.
If you have any questions at all about open banking, feel free to reach out to us.
Frequently asked questions about the financial services industry
What are examples of financial services?
Examples of financial services include:
Checking and savings accounts, credit cards, and loans offered by banks and credit unions
Investment products such as stocks, bonds, mutual funds, hedge funds, and exchange-traded funds (ETFs) offered by brokerage firms and investment companies
Insurance products such as life, health, and property insurance offered by insurance companies
Retirement planning and wealth management services offered by financial advisors
Payment processing services such as PayPal and Venmo
Online lending platforms like LendingClub and Prosper
Foreign exchange services offered by currency exchange businesses
Consumer credit reporting and scoring services offered by credit reporting agencies
Is the financial services industry growing?
Yes. More and more companies are offering financial products and services, such as banking, investing, and insurance.
People are always looking for ways to save and invest their money, new technologies are making it easier for people to access financial products and services, and changes in the economy are leading to growth in the financial sector.
What are some current trends in financial services?
There is an increased focus on digital and mobile banking, the use of artificial intelligence and big data to improve financial products and services, and the growing popularity of Robo-advisors for investment management.
What is the biggest global trends impacting financial services right now?
The biggest global trends impacting financial services right now include the continued growth of digital banking, the rise of fintech companies, and increased regulatory standards.
What are emerging technologies in the financial services industry?
Open banking, blockchain, artificial intelligence, and machine learning are becoming more prominent and can be used for everything from improving fraud detection to automating financial advice.
What are the four main categories of financial services?
The four main categories of financial services are banking, insurance, investment, and financial planning.
How big is the financial services industry?
The financial services industry is a large and growing industry, with the global financial services market is expected to grow from $23,319.52 billion in 2021 to $25,839.35 billion in 2022. [Source]