What is Open Banking?

Open banking uses application programming interfaces to enable third-party developers to create or customize apps and services for financial institutions. This service helps digitize major banking transactions, such as opening accounts, sending and receiving payments, and applying for loans, all in one smartphone app.

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According to the World Bank's 2021 Global Findex Database, 1.4 billion adults globally do not have access to formal financial services (unbanked). The main reasons are lack of money, the distance to the nearest financial institution, and insufficient documentation. These challenges are precisely what open banking is trying to address. Financial inclusion is a crucial pillar in the open banking industry, and it is an ongoing global initiative that can reduce poverty and give equal opportunities to everyone. This principle is one of the key components of the United Nations' Sustainable Development Goals and the World Bank's Universal Financial Access 2020 Initiative.

How does open banking or decentralized finance enable financial inclusion?

It is by democratizing access to financial services through application programming interfaces (APIs). Through smartphone applications and partnerships with major financial institutions, open banking providers are bringing the bank to the people. The industry is revolutionizing access to global banking services. According to research firm Statista, the number of global open banking users is forecast to grow at an annual rate of about 50 percent between 2020 and 2024, reaching 132 million by 2024. In addition, the value of global open banking payments is expected to hit USD $116 billion in 2026.

What is open banking? And how does it work?

Open banking uses APIs to enable third-party developers to create or customize applications and services (e.g., payment gateways and e-wallets) for financial institutions. In the traditional banking model, individual banks own their customers' data because transactions can only be made through specific apps and branches. With decentralized finance, transactions like opening accounts, sending and receiving payments, and applying for loans, are democratized and centralized in smartphone apps, allowing non-banks to compete. The potential of open banking is massive, considering that there are currently 6.6 billion smartphone users globally, according to Statista. That number is expected to grow to nearly 7.7 billion by 2027.

In an open banking system, a financial institution allows access to customer data and financial information to third-party providers (TPPs), which consumers must consent to before using the apps. The APIs aggregate customer data across different platforms/transactions to suggest personalized products and services that suit the users' needs. All these transactions and data analytics are done within secure networks using various encryption security protocols like SSL (secure sockets layer).

Open banking facts & figures

Global open banking users are expected to grow at an average of nearly 50%

By 2021, about 132.2 million adults are expected to be using open baking systems.

The global value of open banking payents is forecast to reach USD$116 billion in 2026.

About 75% of global open banking payment users will come from Europe by 2026.

90% of consumers find open banking apps easy to set up, and 76% will likely continue to use them.

How banking works