Open Banking, Open Finance, and Open Data​: A Disruptive Opportunity for Entrepreneurs

written by Ruan Schutte

Open Banking, Open Finance, and Open Data: A Disruptive Opportunity for Entrepreneurs

Open banking describes the phenomenon in which people and businesses can share their banking data securely with third parties. Open banking has the potential to transform the way we manage money and make decisions about what financial products to use, dramatically improving our personal finances in the process.

It is also a critical opportunity for entrepreneurs who can develop new business models and services using open banking data.

Open banking also represents an opportunity or threat to major financial institutions, and therein lies more opportunities for Entrepreneurs.

What is Open Banking?

Open Banking is a term used for the process of banks making their customers' data available to third-party providers, essentially allowing a customer to share payment information with a third-party provider for some value in return.

This data includes transaction history, account balances, and other financial information that can be used to develop new products and services.

Open Finance expands this concept into a data-sharing model that allows users to share other financial data such as Mortgages, Investment Data, and Pensions & Insurance. Open data allows the customer to share any data about them with third-party providers, i.e., Entrepreneurs.

Open Banking has the potential to greatly disrupt the financial services industry by giving entrepreneurs access to data that banks have tightly controlled. This data can be used to create new products and services that could potentially replace traditional banking products.

The regulations around open banking vary significantly across many countries. In South Africa, there are only a few emerging players currently looking to create some first-mover opportunities. This map gives you a general overview of the Global landscape. https://findexable.com/the-winds-of-change-blow-through-open-banking/

While Open Banking is still in its early stages in many countries, many start-ups and big techs are already using this data or the construct of having access to it to develop new products and services. In the future, Open Banking will likely have a significant impact on the financial services industry.

How does open banking empower entrepreneurs?

Open banking empowers entrepreneurs by providing them with access to a wider range of financial data and services. This allows them to make better-informed decisions about their business and to find new growth opportunities.

Open banking also provides entrepreneurs with a more efficient way to manage their finances. By using open banking services, they can save time and money on accounting and bookkeeping tasks using third-party providers that have access to their banking data. In addition, they can track their spending in real-time and see where they are making the most progress. Currently, in South Africa, I understand that most third-party providers access banking data through "screen scraping" tools and not using regulated API's and other technologies such as in some other countries.

Overall, open banking gives entrepreneurs the tools or opportunities to create the tools others may need to succeed. With access to more data and services, they can make informed decisions about their business. They can also save time and money on financial management tasks.

Benefits for entrepreneurs

Open Banking presents a unique opportunity for entrepreneurs to create new products and services that can improve the financial lives of consumers and small businesses.

Some of the benefits that entrepreneurs can take advantage of through Open Banking in the future may include:

1. Improved access to funding - Open Banking gives entrepreneurs greater visibility into their customer's financial data, which can make it easier to secure funding from banks and other lenders.

2. Increased efficiency - Entrepreneurs can use Open Banking data to streamline back-office processes, such as accounting and invoicing.

3. Enhanced customer insights - By understanding their customer's financial behaviour, entrepreneurs can develop more targeted products and services that meet their needs.

4. New revenue streams - Open Banking provides opportunities for entrepreneurs to develop innovative new products and services that can generate additional revenue.

5. Improved competitive position - By leveraging the data available through Open Banking, entrepreneurs can gain a competitive edge over other businesses in their industry.

For now, in South Africa, many of these solutions do not yet exist at scale, just more opportunities for entrepreneurs in our local context to create solutions.

Challenges for entrepreneurs

Open Banking presents several challenges for entrepreneurs:

1. The regulatory environment is still evolving, and it is unclear what the final rules will be. This makes it difficult to develop products and services that comply with the regulations.

2. The major banks have been slow to adopt Open Banking, which limits the availability of data that start-ups can access. This makes it difficult to develop innovative products and services. There are some fascinating examples globally to learn from.

3. The lack of standardization across banks makes it challenging to develop interoperable solutions.

4. Consumer awareness of Open Banking is still low, which limits the potential market for new products and services.

Partnering Opportunities for Entrepreneurs

Four types of fintech/incumbent partnerships have been identified [Elshof et al. (2021)]:

• Fintech as a front-end solution

• Fintech as a service

• Fintech as a new brand

• Fintech as an investment

For Entrepreneurs who are already working with incumbents (Fintech start-ups in financial services), there is an opportunity to elevate your value. I was fortunate enough to lead an amazing hackathon team that won first prize by demonstrating additional practical value through using Fintech Services with the incumbent's platform technology in a short period, which spun off multiple new opportunities.

Key trends in the space

There are numerous key trends in the open banking space that entrepreneurs should be aware of. First and foremost, there is a growing trend of banks partnering with fintech start-ups to offer innovative products and services to consumers. This trend is being driven by the fact that traditional banks are struggling to keep up with the pace of change in the financial sector and are therefore looking to partner with nimbler start-ups that can help them meet the needs of their customers.

Another key trend is the increasing regulation of the financial sector, which creates opportunities for open banking start-ups that can comply with stringent regulations. This regulatory environment is also driving consolidation in the industry, as smaller players are struggling to keep up with the compliance costs.

Finally, another major trend in open banking is the shift away from traditional banking products and services towards newer, more innovative offerings. This is being driven by consumer demand for more convenient and user-friendly products and services that meet their needs.

Conclusion

Open banking is a disruptive opportunity for entrepreneurs because it allows them to create new products and services that take advantage of data that was previously siloed within banks. This data can be used to improve customer experience, create new financial products, and make better decisions about how to allocate resources. Open banking is still in its early days, but it has the potential to radically transform the way we interact with our finances.

Entrepreneurs and traditional big financial service providers together can be a force to challenge the significant tech threats that both entrepreneurs and incumbents face.