The Death of Institutional Banking?

Could the rise of open finance spell the end for institutional banks?

It's unlikely, and advances in the sector should instead mark the beginning of a more collaborative era with fintechs.

The banking sector has a reputation for conservatism - which may be justified, given its overriding responsibility for protecting the world's finances. Indeed, engaging in poorly understood or ill-conceived activities can quickly jeopardize the whole system. Yet evolution is necessary to drive the sector forward and as the accelerating momentum of neobanks shows, the appetite for change is clearly there. With the latest regulatory developments surrounding open finance, is the reign of traditional banking finally coming to an end?

The underlying principle of open banking surmises that the seamless exchange of customer data between banks and authorized third parties provides enhanced financial services, promotes innovation, facilitates the emergence of new players and thus, creates significant opportunities for everyone involved.

In practice, a mandated provider – often a fintech – is granted access to a user's banking data through an API (Application Programming Interface) in order to accomplish its mission. In this new business model, increased competition and efficiency drive prices down, while the use of modern technologies and analytics ensures more innovative, relevant, and customized offerings.

Among the most promising use cases in the B2B space are payments, invoicing, accounting, cash management and access to credit. 

Regulators in Europe have long been exploring the development of open banking. But although progress has been made, banks have been criticized for their frugality and lack of coordination in granting access to their "data vaults", creating unnecessary friction and inefficiencies.

In July 2023, the European Commission therefore announced a complete overhaul of its open banking rules,  proposing three main axes of development:

• an amended Payment Services Directive (PSD3) to be transposed into national law, aimed at supervising, and better defining licensing requirements for payment institutions and Electronic Money Institutions.
• a Payment Services Regulation (PSR) applicable directly to Member States and covering all rules relating to the activities and business conduct of payment service providers. More specifically, the PSR provides greater emphasis on certain technical aspects of open banking, considerably strengthening the requirements for equal treatment between banks and non-bank participants and reinforcing payment safety.
• a framework for Financial Data Access Regulation (FiDA) to strengthen open banking, unify customer data access rules across multiple financial services and extend their principles beyond payments to a broader open finance paradigm.

While it is too early to conclude on the final shape of these draft regulations, we do know that the proposed package could have a considerable impact: it promises greater integration of fintechs and provides an environment in which banks may feel compelled to accelerate their opening up to outside parties.

While some may see this as the end of the road for traditional banks, it is, in fact, a significant opportunity. We expect the upcoming PSD3/PSR package to mark the start of a more collaborative era between banks and fintechs and to accelerate banks' adoption of more data-centric business models. In particular, banking as a service (BaaS) and banking as a platform (BaaP) will continue to gain in importance and coexist to enable successful transformation.

While not perfect, this transformation is underway, and looks set to gather momentum over the next few years, particularly in the B2B space where open banking penetration has been more muted, mainly due to unnecessary competitive frictions and wasteful strategic maneuvers on both sides of the playing field.