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Are mobile payment apps safe to use?
Open banking promises more innovative and customer-friendly financial services. But is it safe?
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The world of banking is changing fast. What used to be an industry dominated by big banks has opened up to new, smaller players called fintechs – financial technology companies.
Banks are no longer just providers of financial services. They have become platforms that connect customers with fintechs, reshaping how we handle our money.
A new law changed our way of managing money
Thanks to a set of European laws known as PSD2, fintechs can now use information from banks to offer innovative services, creating new ways to manage and use money.
“This law has created an entirely new relationship between banks and fintechs,” says Ahmad Ghazawneh.
He is an associate professor at Kristiania University College's School of Economy, Innovation and Technology.
“While there are challenges – like security risks and increased competition – the potential benefits of open banking are too big to ignore," he says.
He suggests that if banks can manage their relationship with fintechs effectively, the future of banking could become more innovative and customer-friendly.
Banks have to share customer data
Open banking is a term describing a system where banks allow other companies, called third-party companies (like fintechs), to access customer data with their permission.
Previously, banks kept this information to themselves, but PSD2 forces banks to share this information with licensed fintechs.
The main goal of open banking is to promote innovation and offer customers more choices when it comes to financial services.
For example, instead of only applying for a loan through your bank, you could use a fintech app like Klarna to compare different offers and manage your finances.
These apps can make things quicker, cheaper, and easier for customers because they can use real-time data straight from your bank.
Are banks and fintechs partners or rivals?
In a recent study, Ghazawneh and Osama Mansour from Lund University explore whether banks and fintechs are partners or rivals.
Banks have traditionally dominated the financial world because they control all the customer data. Open banking now gives fintechs access to this data, allowing them to create similar or even better financial services.
This creates a dynamic where fintechs depend on banks for data, while banks rely on fintechs to offer more innovative services.
“Banks can no longer act as gatekeepers, controlling all the information and services. Instead, they have to collaborate with fintechs and become orchestrators,” says Ghazawneh.
In this role, banks work behind the scenes, managing the flow of data to help fintechs deliver their services smoothly.
A new chapter in banking
PSD2 requires banks to provide basic access through application programming interfaces – APIs. These are tools that allow fintechs to connect to a bank’s data.
Some banks offer ‘Premium APIs,' which give fintechs even more ways to interact with bank systems. For example, fintechs like Vipps offer real-time payment updates and easy peer-to-peer transfers, while Klarna offers automated loan applications.
In this way, banks are not just banks anymore. They become a platform that helps other companies deliver financial services. Customers might not even realise they are using a bank’s infrastructure because they interact directly with fintech apps.
“We call this invisible banking or embedded finance, where the bank works in the background to make sure everything runs smoothly, but the customer’s experience happens through the fintech app,” says Ghazawneh.
The risks of open banking
Open banking comes with risks.
“Banks now have less control over who can use their data and how it’s used. PSD2 requires banks to share data with any licensed fintech, which could include potential competitors,” says Ghazawneh.
While banks enable new services, they also face competition from tech giants like Apple or Amazon, who are entering financial services.
There are also concerns about security and privacy. With more companies accessing customer data, it becomes harder to ensure that this data is always protected.
Banks are responsible for keeping data safe but they have less control over how third parties manage it.
Collaboration benefits customers
So, what is the future of banking?
Ghazawneh believes banks should embrace their role as platforms. Instead of viewing fintechs as competitors, they should see them as partners who can help offer better services to customers. By collaborating with fintechs, banks can improve customer experiences and provide services that would be difficult to build on their own.
"While there will always be competition, the banks that can successfully manage partnerships with fintechs will have a better chance of staying relevant in a rapidly changing industry," says Ghazawneh.
Reference:
Mansour, O. & Ghazawneh, A. 'The Evolving Interdependencies between Banks and Fintechs within Open Banking Platforms', Conference paper. Forty-Fourth International Conference on Information Systems, Hyderabad, India, 2023. (Abstract)
