COVID-19 Impact on Open Banking – doCode Blog

The pandemic has severely impacted customer needs in the financial sector. In this article, we will talk about open banking and some other segments in fintech that are becoming the most in-demand.

Open banking

As we know, Open Banking is a fundamentally new type of banking, which was originally intended to improve market competition, stimulate innovation and offer more personalized and more profitable services for end-users.

In terms of the Second Payment Directive PSD2, which is the legal framework for Open Banking in Europe, it is a pan-European regulatory scheme that obliges banks to exchange data with third-party service providers (e.g., fintech companies, various startups) at the request of customers via the Open API.

During the years of the pandemic, this technology received a powerful impetus, thanks to which developers can create fintech applications and services for specific users of financial services.

Open banking allows trusted companies to work with the information of bank customers safely. Previously, startups did not have access to it. And this made it impossible to implement many innovative ideas.

Thanks to open banking technology, it is possible to create applications and platforms that contain all financial information from different banks in one place. Thanks to this, users can receive a salary using one bank card, keep money in another, and pay with a bank card with the highest cashback.

In general, Open Banking is an excellent trend for thousands of fintech startups, whose work in a pandemic is complicated by the dominance of the largest market players. New companies can leverage open banking data to develop innovative, customer-friendly financial products.

By the way, in the European Union, open banking tools have been promoted for several years thanks to the adoption of the PSD2 regulation directive, which obliges banks to prepare an open technical system for integration with its resources. The directive went into effect in September 2019.

A unified payment space is emerging in the EU, thanks to which customers can choose attractive products and services from different banks. They can manage accounts in different financial structures in one application, pay for services, and receive the most personalized offers on loans, mortgages, leasing, and other products.

According to some experts, the large-scale use of Open Banking this year may result in the emergence of online financial “hypermarkets” and marketplaces of services tied to open financial information. 

Let’s now take a look at several other trends. 

Embedded Finance (seamless services)

According to expert forecasts of the global technology company Digital Horizon, in 2021, banks will increasingly “move away” from customers. During the pandemic 2020, quite tough competition for the consumer in the payments market unfolded (opening accounts or making payments).

Today, according to many expert estimates, a dynamic revision of traditional financial products is taking place:

  • Insurance is entering the territory of loans.
  • Hybrid models are emerging that combine payment, investment, credit, insurance, and other components.

That is why Embedded Finance tools have become widespread this year, allowing you to integrate payments, debit cards, loans, insurance, and even investment instruments into any non-financial products and applications.

We are talking here not only about the built-in payment page directly on the website of an online store or marketplace. 

Thanks to Embedded Finance, without additional bureaucracy and filling out a questionnaire, it is also possible to transfer money, get a loan, take out insurance or make an investment through applications, social networks, messengers, which, it would seem, have nothing to do with finance.

This approach will unambiguously increase the profits of banks and fintech, as it will lead to lower costs for traditional banks for marketing and branding. 

Accordingly, fintech solutions will be in high demand among banking institutions, which are planning to migrate to the fintech ecosystem in order to gain competitive advantages in a highly competitive environment.

Pay on demand

The Covid-19 pandemic has also become a catalyst for a global change in access to wages. The deterioration in the ability to pay and the well-being of people around the world due to the large-scale economic crisis has led to changes in access to wages.

The Pay on Demand innovation is designed to reduce the loan burden of line personnel, eliminating the need to take out loans, reducing the risk of delays in payments and bank overdraft fees, which on average costs each American about $2.4 thousand a year.

Most services have a subscription model: monthly usage costs about $ 10. Another option is a commission for each transfer. All stakeholders benefit from the Pay on Demand format because a reliable financial “cushion” of safety is provided for hired personnel, startups receive high and stable profit on commissions. Moreover, it becomes possible for employers to retain employees in the company without increasing personnel costs.

Conclusion

The Covid-19 pandemic has changed the lives of all of us, entering different spheres of life. As you have already understood, banking was also greatly influenced by it. But in the case of banking, the pandemic leads to more convenient and innovative decisions that improve people’s lives. It remains to be seen what else to expect.