In the modern digital world, open banking’s data sharing makes switching bank accounts easier, breaking down walls between institutions. Despite this innovation, FinTech companies encounter challenges from traditional banking that significantly slow down their growth.
This article explores overcoming these challenges and highlights open banking’s disruptive potential for FinTech.
Traditional finance limitations for FinTech
The influence of traditional institutions has been strong for a long time, as they have dominated markets and set the standard for how things are done. However, with technology disrupting industries globally, FinTech startups have emerged as strong competitors, challenging the existing norms and pushing the boundaries of innovation.
Reliance on traditional data sources can impose significant constraints on the innovation and growth potential of FinTech companies due to several key factors:
Limited scope of data
Traditional data sources usually consist of structured data from internal banking systems, credit bureaus, and regulatory filings. Although this data offers valuable insights into historical financial transactions business lending and creditworthiness, it often needs more detail and depth. FinTech companies need a wider range of data to create innovative solutions that meet the changing needs and preferences of consumers.
Lack of real-time insights
Traditional data sources may not offer insights into consumer behavior and market trends in real-time or near-real time. FinTech companies operating in fast-paced environments need timely data to make informed decisions and develop responsive solutions. Without access to real-time data, FinTech firms may struggle to stay competitive and agile in dynamic market conditions.
Inability to capture non-financial data
Financial transactions are just one part of consumer behavior. Traditional data sources often miss non-financial factors that affect financial decision-making. FinTech companies aiming to provide personalized financial solutions need access to a wide range of data, including social media activity, lifestyle preferences, and demographic information.
Core concepts of open banking
Open banking has transformed the financial industry by facilitating secure customer data sharing among banks, non-bank financial entities, and third-party financial service providers. But what are the core principles of this financial model?
What is open banking?
Open banking is a financial services model that allows third-party developers to access financial data in traditional banking systems through application programming interfaces (APIs).
The open sector is continuously growing as more financial institutions and service providers embrace the principles of transparency and collaboration. According to Statista, the value of open banking transactions worldwide is estimated to grow by more than 500 percent between 2023 and 2027.
Value of open banking transactions in 2023, with a forecast for 2027
Source: Statista
This growth is fueled by the increasing demand for personalized and personal finance management and innovative financial solutions among consumers.
The core principles of open banking
Three core principles underpin open banking:
- Real-time data sharing: This allows authorized third-party providers to securely access your financial data, including transaction history, account balances, and other relevant information, with your explicit consent. This data is shared electronically and updated frequently, enabling a real-time view of your finances.
- Openness through APIs: Application Programming Interfaces (APIs) act as the bridge between banks and third-party providers. These APIs provide a standardized way for authorized providers to access your financial data securely, streamlining the process and ensuring compatibility.
- Customer control: Users can choose which third-party providers can access the information and have the right to revoke access at any time. Open banking allows to leverage the financial data for personalized services without compromising the user’s privacy.
With an API-first approach to connect financial institutions with third-party providers, open banking is similar to Banking as a service (BaaS). While both models use technology to improve financial services, they serve different needs within the same financial institution and ecosystem.
Open banking vs BaaS
The difference between open banking and Banking-as-a-service (BaaS):
| Feature | Open banking | BaaS |
| Focus | Customer control over data and access to wider financial services. | Enabling non-banking companies to offer financial services. |
| Data access | Provides access to customer’s financial data (transactions, balances) with their consent. | Provides access to the full range of banking functionality (account opening, payments, etc. |
| API function | Data retrieval (read-only). | Full functionality (read-write). |
| Regulation | Requires customer consent and strong data security protocols. | May require additional regulatory compliance depending on the offered services. |
| Customer Experience | The customer interacts with the third-party app. | The customer interacts with the non-banking app offering financial services. |
| Use case | Third-party apps for financial aggregation, comparison, and personalized services. | Embedding financial services into non-financial apps (e.g., e-commerce checkout, money transfers within a ride-hailing app). |
Simply put, the key difference between them is that open banking is about sharing users’ data, while BaaS is about accessing banking features.
Open banking use cases empowering FinTech
Open banking serves as a catalyst for innovation in the financial sector, empowering FinTech companies to revolutionize traditional services. This unlocks a world of possibilities for innovative financial products and services, all focused on improving the user experience. Below we explore the most popular open banking use cases:
Enhanced customer onboarding & KYC
Gone are the days of lengthy paperwork and tedious verification processes. Open banking allows FinTechs to access user data with consent, streamlining KYC procedures.
SDK.finance provides pre-built functionalities to seamlessly integrate with open banking APIs, verifying user identities and extracting relevant information electronically. This translates to a faster and more convenient bank account setup experience for users.
Personalized financial products
With access to real-time financial data through open banking APIs, FinTech companies can analyze user behavior and preferences to offer personalized financial products and services tailored to individual needs.
Whether it’s personalized budgeting tools, investment recommendations, or insurance offerings, open banking empowers FinTech companies to deliver hyper-targeted solutions that resonate with users on a personal level.
For instance, a FinTech company might use open banking data to send a custom invitation to a user to explore a new investment product that aligns with their risk tolerance and financial goals.
Streamlined loan and credit scoring
Traditionally, loan approvals could be slow and cumbersome. Open banking data allows FinTech lending platforms to access a more holistic view of a borrower’s financial health. This can include income verification, spending habits, and creditworthiness indicators.
Automated wealth management
Open banking data enables FinTech firms to develop automated investment and wealth management solutions that leverage real-time financial data to optimize portfolio performance and mitigate risks.
By harnessing the power of open banking, FinTech companies can democratize access to sophisticated wealth management tools and empower users to achieve their financial goals with confidence.
Open finance ecosystem
Open banking fosters collaboration between FinTechs and traditional financial institutions. This creates an open finance ecosystem, where FinTechs can offer innovative services by integrating with existing financial infrastructure.
SDK.finance Platform acts as a bridge, facilitating integration with other financial services. It comes equipped with pre-integrated vendors for key functionalities such as payment acceptance, card issuance, and KYC compliance. This streamlined integration process ensures a hassle-free setup for your financial operations.
Open banking use cases empowered by SDK.finance
Let’s explore how SDK.finance enables various FinTech products to leverage open banking capabilities, with real-world examples for each customer segment:
1. Neobanks
Neobanks are striving to offer a complete digital banking experience that competes with traditional banks. By integrating with SDK.finance and Salt Edge, neobanks can give users a real-time overview of all their bank accounts, make smooth domestic and international transfers, and provide personalized financial advice based on detailed transaction histories. This places neobanks in a strong position to not only rival traditional banks but also to excel in delivering exceptional customer experiences.
Key improvements:
- Extensive bank connectivity: Leverage Salt Edge’s connection to over 5000 banks worldwide for comprehensive account aggregation and management services.
- Domestic and international transfers: Facilitate seamless domestic and international transfers via SWIFT and SEPA.
Features provided:
- Real-time account checking: Users can view and manage multiple bank accounts in real-time.
- Seamless payment initiation: Users can initiate payments effortlessly, both domestically and internationally.
Within SDK.finance functionality users can:
- View all their accounts (checking, savings, and investment) from different banks in one place, giving them a comprehensive overview of their finances.
- Easily transfer money between the accounts or to friends and family, both domestically and internationally, without switching between multiple apps.
- Receive personalized savings suggestions based on her spending patterns across all accounts.
- Set up automatic bill payments and track her expenses more efficiently.
2. Digital and mobile wallets
Digital wallets powered by SDK.finance can transform from simple payment tools into comprehensive financial management platforms.
Key improvements:
- Enhanced domestic transfers: Facilitate easy and quick domestic money transfers, improving user experience.
- Extensive bank connectivity: Ensure users can link their bank accounts with the wallet easily.
Features provided:
- Linked bank accounts: Users can link multiple bank accounts to their digital wallet.
- Efficient domestic transfers: Quick and easy money transfers within the country.
SDK.finance functionality allows users to:
- Link all their bank accounts to the digital wallet, providing a centralized view of their finances.
- Easily accept payments from clients, whether they’re using bank transfers, credit cards, or even other digital wallets.
- Categorize the income and expenses automatically, helping them track the business finances more effectively.
- Make quick domestic transfers to suppliers or for personal use, without the need to log into separate banking apps.
3. Payment Service Providers (PSPs)
PSPs can leverage SDK.finance to offer more comprehensive and compliant payment solutions to their business clients.
Key improvements:
- PSD2 compliance: Ensures PSPs can access necessary bank account information without needing an AISP license.
- International transfers: Facilitates seamless cross-border transactions, broadening the scope of payment acceptance.
Features provided:
- Access to bank account information: Simplified access to account information for payment processing.
- Global payment processing: Support for SWIFT and SEPA transfers.
With SDK.finance integration, users can:
- Offer their clients (online retailers) the ability to accept payments from customers’ bank accounts directly, thanks to PSD2 compliance, without needing additional licenses.
- Provide seamless international payment processing, allowing their clients to expand into global markets more easily.
- Offer detailed financial reports and analytics to their clients, helping them understand their cash flow and customer payment preferences better.
- Implement stronger fraud detection measures by analyzing transaction patterns across multiple banks and payment methods.
4. Crypto to fiat solutions
Crypto solutions integrated with SDK.finance can bridge the gap between cryptocurrencies and traditional financial systems more effectively.
Key improvements:
- International transfers: Enables seamless conversion and transfer of funds globally.
- Enhanced security and compliance: Ensures high levels of data security and regulatory compliance.
Features provided:
- Swift and SEPA transfers: Support for international money transfers.
- Secure account access: High-security standards for accessing bank account information.
With SDK.finance integration, users can:
- Seamlessly convert their cryptocurrency holdings to fiat currencies and transfer them to their bank account.
- Make international transfers using their crypto balance, with the recipient receiving the amount in their local currency.
- Pay for goods and services at non-crypto-accepting merchants by instantly converting crypto to fiat at the point of sale.
- View the crypto and traditional bank balances in one place, giving a complete picture of his finances.
5. Money transfer solutions
Money transfer services can use SDK.finance to offer more comprehensive and user-friendly international remittance solutions.
Key improvements:
- Extensive bank connectivity: Allows for broad reach in terms of bank connections, facilitating easier money transfers.
- Domestic and international transfers: Handles both domestic and international transfers seamlessly.
Features provided:
- Multiple bank connections: Users can transfer money to and from a wide range of banks.
- Versatile transfer options: Support for both domestic and international transfers via SWIFT and SEPA.
With SDK.finance integration, users can:
- Link their bank account directly to the GlobalRemit app, making it easier to initiate transfers without manual data entry.
- Send money to the family’s bank accounts in different countries, with support from a wide range of banks.
- Track the transfers in real time, from initiation to receipt.
Implementing open banking with SDK.finance
Open banking is transforming the financial landscape, and SDK.finance is at the forefront of this revolution. Our FinTech Platform, powered by Salt Edge, a leading open banking provider, offers a robust solution for initiating payments, retrieving account information, and streamlining transactions.
Our user-friendly interface allows customers to effortlessly authorize payments directly from their bank accounts, enhancing convenience and security.
Key benefits of integrating SDK.finance:
- Unlock a network of 2,000+ European banks for your customers: Our integration with Salt Edge lets users initiate secure payments directly from their bank accounts, eliminating the need for multiple integrations.
- Seamless user experience: We handle the backend so that you can focus on your application. Users choose their bank, enter payment details, and receive confirmation.
- Enhanced functionality: Beyond payments, users can view information from 5,000+ global banks and leverage additional features like SWIFT and SEPA transfers.
- Simple implementation: One integration with SDK.finance opens a world of possibilities. Sign up with Salt Edge and access these features instantly.
SDK.finance serves as a ready-made FinTech solution, allowing payment companies to seamlessly integrate open banking functionalities into their applications while maintaining the highest security standards.
Wrapping up
Open banking has brought about a new era of financial empowerment, changing the way we manage our money. By allowing secure data sharing and encouraging collaboration, it has paved the way for a range of innovative FinTech solutions.
With SDK.finance’s ready-made infrastructure, streamlined open banking integration, and robust security features, you can focus on building user-centric financial solutions that improve lives and revolutionize the financial landscape.
