Open Banking & Consumer Behavior
Open banking is booming—but so is the need for consumer education
Among the most significant changes to the financial system in recent years is the way customer information is flowing among traditional services to new and emerging fintech players.
Thanks to this integration of financial services—delivered through what is generally called open banking—consumers are increasingly free to share their personal financial data with almost any company they want. In some countries, this rapid rise of open banking has been spurred by regulatory rulings dictating market behavior. In other places, such as the U.S., market behavior itself is the primary driving force behind an array of advances.
But not all consumers are ready. Although more than 60% of consumers are interested in open-banking experiences, 45% remain uncomfortable about sharing their account and personal information with third parties, according to a recent study sponsored by Discover® Global Network.
This gap between the desire for convenience and the perception of risk presents an important opportunity for financial institutions (FIs) to demystify the technology behind these seamless financial experiences. To resolve this for consumers, the industry—both fintechs and FIs working together—need to rethink how they position the concept and reframe it in a way that makes sense for consumers.
“From the consumer’s view, it’s actually quite scary if you talk about open banking because they think that means their data will be leaked to people that shouldn’t have their data,” Finanser CEO Chris Skinner observed in a conversation with Discover Global Network. “I prefer the term seamless banking … It’s all about making banking simpler and easier for the customer.”
Despite some hesitation, consumers are the reason behind seamless banking
While fintechs are creating the solutions, consumer expectations for more convenient and flexible experiences are boosting demand for many next-gen financial capabilities, such as streamlining payments by linking accounts.
There is also growing consumer interest in cutting-edge apps that extend the ease of digital services beyond traditional financial services. By leveraging new technology to share data and services, it’s easier than ever to connect applications, offering consumers the ability to link just about anything from driving directions and food delivery to sending money and paying bills.
“You don’t realize [the applications are] there, but they’re there in the background,” Skinner said. “It’s the invisible, seamless, frictionless experience that improves the customer’s daily life.”
Demand and adoption vary among demographics
Although some age groups and global regions have gravitated to these applications faster than others, each is showing an increasing interest.
In the U.S., for instance, 49% of consumers now have three or more fintech-provided financial services apps on their smartphone, up from 36% in 2021, according to recent research. And younger generations, in general, take the most open view about using apps to share their data, with more than 90% of both Gen Z and millennial consumers having downloaded at least one fintech-provided financial service app to their smartphones.*
However, all consumers express an interest in financial experiences that are faster, open, and embedded—many of them driven by open banking. For instance, 68% of consumers are interested in directing their bank to securely share their information for faster credit, according to 451 Research on behalf of Discover® Global Network. Additionally, the study found that 63% of consumers show interest in open-banking experiences such as faster onboarding, while 60% are open to personalized recommendations based on previous spending habits.*
By providing more consumer education about the financial and other benefits of data sharing and open banking, demand and adoption are expected to grow. “There’s an opportunity wherein if consumers are willing to share more data, fintechs and FIs could provide them better products,” Greg Rains, Director of Emerging Products & Solutions at Discover Financial Services, recently noted.
Consumer adoption will grow when fintechs team with trusted financial partners
To help further adoption of these new capabilities, FIs must also keep in mind that security of personal financial information remains top-of-mind for consumers. Overall, consumers view their banks as the No. 1 most trusted provider to protect their personal data. A full 51% cited their bank as the institution they trust most for open-banking experiences, compared with just 12% for fintechs alone. The study also highlighted consumer interest in other emerging financial experiences, such as real-time payments and real-time P2P transfers.*
As a result, fintech partnerships with FIs are key to consumer acceptance of open-banking services and experiences. A majority of fintechs acknowledge the importance of collaboration. In fact, 63% of fintechs said they were interested in partnering with payment networks for open-banking and open-finance initiatives.* Fintechs also expressed interest in partnering with FIs and payment networks to introduce or market their products to consumers.
Meanwhile, established FIs and networks are exploring partnerships with fintechs to develop and test emerging digital banking innovations and introduce them to their customers. “Incumbent banks must be ready to not only quickly build new products, but to also partner with emerging players to be able to provide consumers the experiences they are seeking,” Rains observed.
Fintechs show increasing interest in partnering on emerging cases
With the rapid increase of fintech companies in the world today, it is difficult to keep track of whether they are leading consumer preferences with new capabilities or responding to consumers as their preferences grow. In fact, both circumstances are occurring, depending on the market and region.
For the fintech community, partnerships with FIs on a global and regional scale can help fill gaps and align their strategies by finding new paths to stay agile and prepare for where the market is heading. A Discover® Global Network study found that 71% of fintechs are interested in pursuing network partnerships for open banking.* Fintechs can also seek to build stronger partnerships with entities such as investment advisors and insurers.
The open-banking use cases that fintechs are interested in pursuing include account-based payments, account linking and credit risk assessments. But there is also a significant pursuit for solutions that expedite payments, international fund transfers or A2A transfers in real time.3 Through robust collaboration, fintechs and FIs can find ways to innovate faster, delivering more of the seamless experiences that consumers are demanding.
The foundation is now for the future of what might be next: open economy
By focusing on consumer behavior and preferences, fintechs can use open banking to build the experiences that consumers are seeking. But they need partners to reach the market. By leveraging collaborative relationships with payment networks, FIs and other entities, the industry is poised to continue innovating with products and services that are scalable and secure.
And open banking is just the start. The potential of a truly connected and secure ecosystem that will benefit consumers on various levels appears likely as the field moves forward. What began as open banking is likely to move well beyond what the industry offers today.
“Over the next decade, you’ll start to see open finance starting to integrate open health and open wealth and open travel and open retail and more services into a complete system,” Skinner said. “And how that develops is going to be really interesting.”
Discover Global Network is engaging with fintechs now to prepare for the changing landscape as technology develops, real-world applications unfold and consumer experiences evolve.
*451 Research, part of S&P Global Market Intelligence, custom Fintech survey commissioned by Discover Global Network, 2022.
The information provided herein is sponsored by Discover® Global Network. It is intended for informational purposes, and is not intended as a substitute for professional advice.