Open banking is the democratization of data previously owned exclusively by legacy financial institutions. This process — by which proprietary data is made available to anyone who has the owner's permission to access it — is facilitated most often by a technology known as an application programming interface (API).
There are several factors driving its adoption, the most obvious of which is the advent of open banking regulation in several jurisdictions, like the EU's revised Payments Services Directive (PSD2). Other drivers include increased competition from fintechs, consumer demand for new products, and the need for banks to find new revenue streams.
Banks adopting open banking have taken different approaches. Some are simply taking the necessary steps to comply with regulatory requirements while others are actively embracing open banking in an effort to maintain their retail banking dominance. Those choosing to do the bare minimum are at serious risk of damaging their positions in the financial services ecosystem.
There are several different models of open banking that banks can choose from. Which model, or combination of models, a bank adopts depends on its priorities and the drivers it finds most imperative. Models include creating an app store, operating a sandbox environment, and charging for use of APIs. Some banks are also striking individual deals with specific third parties.
Open banking will have a significant impact on fintechs. With access to banks' systems and vast data stores, fintechs will be able to provide more personalized products, while operating with greater autonomy. However, open banking will also increase fintechs' regulatory and cybersecurity burdens.