Open banking will be beneficial to customers. It can enhance financial transaction convenience and, hopefully, lower costs. In addition, new fintech companies may emerge and introduce innovative new financial services. Existing banks will make efforts to withstand competitions with fintech companies, which also contributes to efficiency in the financial sector. We may expect that open banking will offer new opportunities for the development of new financial services and new fintech companies.

 

Now is a very early stage of open banking and fintech, and thus it is hard to forecast the future shape of financial sector. Open banking and other similar policy measures will lower or eliminate traditional entry barrier to banking businesses, which intensifies competitions between existing banks and new fintech companies and also competitions among banks. While banks have relative advantage in terms of customer relationships, fintech companies may be relatively good at introducing new financial services. Although it is difficult to predict who will eventually win, we may conceive possible scenarios. First, existing banks may quickly and sufficiently modernize themselves to retain their customers. Under this scenario, open banking would lead to efficiency improvement in the financial sector. Second, the so-called “neo-banks,” equipped with an extensive use of technology, may significantly replace existing banks by offering open banking and other new innovative services at a lower cost. Third, fintech companies may take a considerable market share by offering specialized financial services. This scenario implies that financial services will become modularized and fragmented. Fourth, fintech companies may dominate front-end customer platforms to offer financial services from a diverse group of providers. Existing banks will then become commoditized service providers, and platform providers will take the direct customer relationship. Lastly, only fintech companies will survive and banks will become extinct.

 

Besides the opportunities, however, we also should be wary of the challenges posed by open banking (and other fintech innovations). Although the aforementioned scenarios imply challenges that are different from each other, we may conceive the following challenges at the current stage. First, operational risk may increase because of the further development of cyber-risk. This heightened cyber-risk can also raise consumer protection and data protection regulation issues. Further, more reliance on outsourcing could increase operational risk and necessitate third-party risk management processes. Second, traditional banks may lose their customer relationships, which results in revenue and profit losses. Less profitable banks could raise safety and soundness issues and contribute to systemic risk. Third, losing their direct consumer relationships, banks would have limited ability to monitor end-to-end transactions. If only a small number of BigTech companies take a large share, then it could raise the “too-big-to-fail” problem. Under the platform-dominating scenario, the interconnectedness between platform providers and service providers could increase. Each of these new phenomena could increase systemic risk.

 

Open banking and other fintech innovations will not only offer new opportunities and but also pose challenges for us. We should closely monitor potential risks and appropriately contain them for a sound development of open banking and new fintech innovations.