Reform and Regulatory Challenge of Open Banking to Traditional Financial Industry
Sep 18, 2021 By Bethany Walsh

The essence of open banking is sharing financial information. It is the reconfiguration of financial data as a factor of production by using modern new technologies and new institutional arrangements, thus forming a new financial business form. Open bankingdoes not change the essence of finance. It is the same pricing of credit risk, but the way that open bankinguse for pricing of credit risk is different. It is the change of open bankingto the traditional financial service, andwill have a subversive impact on the traditional financial industry.

First of all, open banking is a new form of financial industry, subverting the behavior of traditional financial industry. Open bankingalso operatesgeneral financial services, such as loans, deposits, payments, remittances, foreign exchange transactions, investment, insurance and wealth management, and even innovatessome financial services that do not exist in the traditional sense. However, the financial services of open bankingdo not need to incorporate different services into different industries. Instead, they break the limits of the traditional financial industry and integrate different financial services through various platforms and APIs, as toprovide customized financial services for customers. As a result, the traditional financial industry will be completely overturned.

In addition, traditional banks only develop the services and products they think customers need according to the existing plans, and then make customers passively accept them through different marketing methods, or even through institutional arrangements to make customers passively accept them, so as to form the market scale and profit model of banks. Under the condition of open banking, due to the financial data sharing, data ownership and usageright transfer to the clientor consumer, customers can integrate and use their data resources on the basis of the authorization by third party providers, and it also enablesthe third party providers design customized financial products and servicesaccording to customers. Customer’s financial behavior changes from passive acceptance to active choice.

For example, when a customer wants to obtain financing for a loan, he doesn't care where the loan comes from (whether it’s from a bank or from an investment company), but how to get the money he needs faster, more conveniently and at a lower interest rate. This is because through the API, the financing account manager canunderstand the consideration terms of all the third party providers,and ultimately provide clientthe best recommendation and obtain a mutually acceptable loan (smart) contract. During theprocess, customers, banks and third party operators are all properly added to the revenue. This is true of loan financing, as well as other financial services such as deposit investment and insurance in the future. The behavior of the entire financial market will becompletely overturned.

Secondly, open banking has changed the business model of traditional banks. The operation mode of traditional banks is centered on the development of products and services to improve the efficiency and scale of products and services to win the market and profits. The core part of this business model has remained unchanged for decades. There are problems such as high operating costs, lack of financial functions, low efficiency, lack of innovation motivation and ability, and homogeneity of financial services. This is not only a huge waste of resources, but also the biggest obstacle to financial inclusion.

Open banking should change the rules of the traditional banking game, take the customer as the center, integrate resources with the latest technologyandencourage financial innovation. Thus third-party providers canprovide customers with better, more convenient, more cost-effective, more transparent and more inclusive financial services, and continuously improve customer experience. Finally, it canachieve automation, action, intelligence and innovation of financial services, popularization, democratization, universal benefits and high efficiency. It can be seen that the operation mode of open banks will have a subversive impact on the operation mode of traditional banks.

Finally, as the traditional financial industry is basically overturned, it will not only change the organizational structure of the financial industry, but also change the way the financial industry is regulated. Under the condition of open banking, the functions and institutions of traditional finance are subverted, so the traditional functional supervision, institutional supervision, active supervision, passive supervision and so on basically do not exist. The new regulatory model emphasizes the protection of consumers’rights and interests (before, during and after the event), the licensing review of Fin-tech companies and platforms, the setting of API technical standards and the review of pre-established interest relationships, etc. The regulatory approach is completely different from the previous one.

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