Barath Narayanan, Global BFSI and Europe Geo Head, Persistent Systems
Adoption of open finance is being fuelled by technological advancements, evolving consumer expectations, and regulatory push for increased competition and innovation in the financial industry. One of the key shifts driven by open finance is the increasing transfer of financial data control from institutions to consumers and their ability to securely share their data with third parties on demand. The idea is to support customers’ needs better by bringing innovative and personalized financial services to market. This evolution extends beyond technology— it redefines how institutions engage with customers and partners and compete in a rapidly changing market.
The Role of Regulation in Driving Change
Regulatory frameworks, particularly in the UK and EU, have been instrumental in promoting open finance. Initiatives such as the UK’s Open Banking Implementation Entity (OBIE) and the EU’s Revised Payment Services Directive (PSD2) have established clear pathways for data sharing. However, global standardisation remains a challenge. Collaborative efforts, such as the World Economic Forum’s Global Open Finance Framework, are steps in the right direction but require wider industry participation.
The Challenge of Legacy Systems
According to Grand View Research, the global open banking market is set to grow to $135.17 billion by 2030 at a CAGR of 26.9%. Despite the regulatory push and market potential, legacy technology systems remain a formidable barrier to the widespread adoption and successful implementation of open finance.
Many established financial institutions possess outdated IT infrastructure that was built decades ago and has iterated through changing business requirements and technology migrations, making it difficult and costly to integrate with modern APIs and data-sharing platforms. These legacy systems often lack the flexibility, scalability, and security features required to support the real-time data sharing and interoperability essential for open finance. Key challenges posed by legacy systems are proprietary data formats and protocols incompatible with open standards, monolithic designs with limited API capabilities, security vulnerabilities, and lack of documentation.
Technology as the Enabler
Financial institutions are embarking on legacy modernization and technology transformation programs. The key investments are towards replacing outdated systems with cloud-based platforms, embracing cloud-native architectures for new applications, adopting microservices architectures, implementing robust API management solutions, data sharing platforms, and identity verification solutions that enable seamless and secure data sharing across the ecosystem.
However, modernizing legacy systems can be complex and costly, requiring significant investment in technology, talent, and organizational change. The key is to adopt a strategic and phased approach to modernization, focusing on the areas that will deliver the greatest business value and minimize disruption to existing services.
Open banking APIs are the foundation of the open banking ecosystem, enabling secure data sharing between banks, third-party providers (TPPs), and technical service providers. These APIs allow TPPs to access customer data from banks, with the customer’s consent, to provide innovative financial services and products. Concerns over data privacy and cybersecurity need to be addressed at the outset of modernisation efforts, and investment in robust cybersecurity measures is non-negotiable.
Fintech Collaboration: A Competitive Advantage
Alliances with fintech innovators have become a cornerstone of the open finance movement. Rather than competing, banks are increasingly collaborating with fintech firms to deliver innovative solutions. Challenger banks, known for their agility, have leveraged collaborations with financial technology firms to expand their services rapidly. This “coopetition” model is driving faster product launches, from embedded finance to alternative lending models. Research and Markets predicts the embedded finance market will reach US$690 billion by 2030, highlighting the growth potential of these collaborations.
An ecosystem approach enables financial service providers to expand their market base, innovate beyond their internal capabilities, and provide customers with a broader range of integrated services. As competition intensifies, banks that embrace open ecosystems will lead the industry’s next wave of innovation.
Looking Ahead
There is value for financial institutions to invest in legacy modernization even without the open finance directives. By investing in new technologies, strengthening partnerships, and staying ahead of regulatory shifts, banks can shape the future rather than simply adapt to it. The entire financial services ecosystem from traditional financial institutions, digital-native FinTechs, technology and platform providers, regulators, and even digital savvy consumers have a role to play in this disruption. As open finance continues to evolve, it is likely to have a transformative impact on the financial services industry, creating new opportunities for innovation, competition, and financial inclusion.
