Kalyan Gottipati is VP, Principal Solutions Architect at Citizens Financial Group.
Open banking is revolutionizing financial services by enabling secure data exchange between banks and third-party providers. The European Union’s Revised Payment Services Directive (PSD2) played a crucial role in making open banking a reality across Europe. A 2023 analysis by the European Commission found that PSD2 has fostered innovation and competition in the payments market.
The global open banking market exceeded $30.89 billion in 2024 and is projected to reach $38.86 billion by 2025, growing at a compound annual growth rate (CAGR) of 25.8%. Application programming interfaces (APIs) play a key role in ensuring secure and seamless data connections between financial institutions and developers.
Open Banking’s Benefits
Open banking can provide both customers and businesses with new ways to interact, manage money and share responsibilities. For consumers, open banking provides access to personalized services, allowing banking products to be tailored and processed directly by providers at the time of the transaction. It also enhances control, giving individuals the ability to grant access to their financial data while maintaining awareness of its usage.
Additionally, consumers gain better financial insights through real-time budgeting, saving and investment tools. Improved access to credit is another key advantage, as real-time financial data enables more accurate and dynamic credit assessments.
For businesses, open banking streamlines processes by integrating payment systems in a way that reduces transaction friction. It also opens new revenue streams by enabling businesses to develop and manage APIs or collaborate with third-party developers.
Improved customer engagement is another benefit, as access to consumer behavior insights allows businesses to tailor their offerings more effectively. Finally, cost efficiency is achieved through automation, reducing the need for manual data handling and optimizing operations such as inventory and financial management.
Challenges In Open Banking Implementation
Despite its benefits, the road to open banking is riddled with obstacles. Here’s a detailed look at the main problems and best practices for overcoming them.
Regulatory Compliance
Navigating regulatory frameworks across different regions is complex:
• Europe (PSD2): PSD2 requires banks to securely share customer data while complying with strict standards such as Strong Customer Authentication (SCA).
• Australia (CDR): CDR extends beyond banking to industries like energy and telecommunications, setting a precedent for future regulations.
• United States: A fragmented legal landscape creates uncertainty, forcing banks to adopt varying compliance strategies.
While compliance is costly, it also builds trust. Financial institutions can turn regulatory frameworks into opportunities to adopt cutting-edge technologies.
Security And Privacy Risks
Protecting sensitive data in open banking is a top priority. Cyber threats are on the rise, and there is a growing need for stronger security measures. Encryption, tokenization and multifactor authentication (MFA) should supplement public data-sharing policies.
The technological capabilities of open banking can help mitigate risks through advanced data analytics, which can detect and flag potential fraud in real time.
Technology Infrastructure Gaps
The failure of older systems is often followed by innovation stagnation.
• Many banks still operate on outdated systems that struggle to integrate with APIs.
• Scalability and resilience must be prioritized.
Based on my experience, I’ve found that cloud-native architectures and microservices can help modernize legacy systems.
Ensuring Inclusive And Equitable Credit Access
In several areas, such as the U.S., a significant part of the population lacks a traditional credit score. Per the Consumer Financial Protection Bureau (CFPB), 26 million Americans are considered “credit invisible” and another 19 million people do not have a sufficient credit history to obtain a credit score.
By allowing banks to access a larger number of financial data sources, open banking can help change this. These sources might include transaction history, saving habits and timely delivery of the rent for improved risk assessment.
Conclusion
Open banking redefines how individuals and businesses interact with financial institutions. By leveraging APIs for secure data sharing, it facilitates personalized financial services, enhances credit accessibility and streamlines banking processes. However, challenges remain, including complex regulations, outdated systems and cybersecurity risks. While these obstacles require careful management, they are not insurmountable.
Beyond just data-sharing, open banking represents a step toward a more transparent, inclusive and customer-centric financial ecosystem. By prioritizing security, compliance and innovation, banks can help shape a financial landscape that benefits all stakeholders.
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