Since its inception in 2018 in Europe through regulatory initiatives like the Second Payments Services Directive (PSD2) and Open Banking Standard in the UK, open banking has spread across more than 50 countries in the world. From a typical compliance exercise, it has evolved into one about developing innovative customer propositions for both retail consumers and businesses alike. Open APIs have become the standard of collaboration in an increasingly busy financial ecosystem where banks, neobanks, fintechs, payment disruptors and the ecommerce and technology giants strive for dominance in different parts of the banking value chain; a value chain that has fragmented along manufacturing and distribution. Banks are exploiting open banking to experiment with new business models to break into new markets, to consolidate market share in mature markets, or defend against aggressive new entrants in others.
We are now seeing the rise of embedded finance, and the demand for a unified customer-centric digital platform to deliver both, financial and non-financial products and services. Embedded or open finance (Open X) which includes not just mandated accounts and payments but all financial products such as mortgages, loans, pensions, and insurance, creates even more opportunities for innovation. As embedded finance is spreading to all consumer-facing brands, a particular new trend is gaining ground: Banking-as-a-service (BaaS), which has arisen under the umbrella of the open banking framework. BaaS offers a radically different approach to financial services—one that deconstructs the old, traditional model and places its building blocks in the hands of a wider range of stakeholders.