Explore the potential of open banking and its projected market value of over $123.7 billion by 2031 in this insightful piece by Christopher Ball, co-founder of Finch Technologies. Ball delves into how traditional payment methods are evolving, the global stakeholders pioneering this transition, and the vital role of South African banks and fintechs.
Open banking is poised to reach a total market value exceeding $123.7 billion by 2031. To stay competitive globally, South African banks must embrace open banking; this presents a unique opportunity to innovate, satisfy customer needs, and secure an edge in the market.
The financial landscape is rapidly evolving, with traditional payment methods like cash, cheques, and cards losing market share to more innovative alternatives. Digital wallets, bank-to-bank payments, BNPLs, and cryptocurrencies are leading this trend.
A Boston Consulting Group study shows that 89% of South Africans exclusively use digital banking, indicating a wider industry trend and reducing the need for physical banking facilities. As open banking gains traction, it brings financial inclusion a step closer, offering new opportunities to previously marginalised segments of society.
Global stakeholders setting the stage
The European Union’s Payment Services Directive (PSD2) establishes the standard for open banking by facilitating third-party access to customer data, encouraging competition, and promoting innovation.
In the UK, the Financial Conduct Authority (FCA) drives this movement, enabling companies to use open banking APIs, thus fostering collaboration and growth.
The Central Bank of Ireland diligently oversees open banking, ensuring a secure environment conducive to progression. In Hong Kong, the Open API Framework, introduced in 2019 with 20 banks offering over 500 APIs, enables customers to access extensive banking information, resulting in improved services and user experiences.
In the fintech space, TrueLayer has risen to the top in the UK by providing secure data-sharing infrastructure via open banking APIs. The company has introduced innovative solutions like variable recurring payments (VRPs), transforming the industry. TrueLayer’s success stems from strategic partnerships with all major UK banks.
Key South African players
Key players shaping the open banking ecosystem in South Africa include regulators, financial institutions, and TPPs. South Africa has recently taken a promising step towards regulating open banking, signalling progress.
To further stimulate fintech growth, the South African Reserve Bank (SARB) is broadening its focus beyond screen-scraping businesses, and has already signalled an intention to regulate data sharing. Notably, on May 23, SARB made a significant move by issuing a draft directive through its National Payment System Department (NPSD), addressing Instant Electronic Funds Transfer Credit (Instant EFT) payments.
This directive demonstrates a commitment to bolstering security and regulation in South Africa’s financial landscape.
Collaborative initiatives, like the Intergovernmental Fintech Working Group (IFWG), engage financial sector regulators, competition authorities, and industry stakeholders. In Finch Technologies’ recent whitepaper, they provide insights on the necessary framework for banks to fully harness the potential of open banking.
Major banks like Investec, Discovery Bank, Capitec, and Nedbank are investing heavily in the open banking landscape. Investec offers API access to consumers and businesses, prioritising simplicity and compliance.
Discovery Bank’s app supports the open banking ecosystem, enabling customers to access value-added products and integrate non-Discovery products to enhance their Money Status. Capitec has partnered with Ozow to provide consumers with secure online payments via Capitec Pay, emphasising convenience and cost-effectiveness. Nedbank has partnered with Xero to integrate banking transactions for SMEs, thereby streamlining accounting processes.
Fintechs, such as Finch Technologies, truID, BankserveAfrica, EasyEquities, Ozow, and Stitch, will play a significant role in driving this initiative, leveraging reliable financial data to develop innovative financial products.
Banking benefits
Open banking offers numerous benefits to banks, fostering collaboration with TPPs to spur innovation and improve value propositions. It enables banks to better engage customers, deliver personalised experiences, and gain insights for informed forecasting.
Compliance becomes simpler, costs decrease, and shared data improves KYC and AML protocols. Moreover, embedded finance extends to new customer bases, while the repackaging of financial products allows for customisation and choice. Embracing open banking empowers banks to remain competitive and offer comprehensive services that meet evolving customer needs.
With over 600 insurers and 6 000 lenders, a broad range of players can participate in this ecosystem. The country processes millions of applications for loans, insurance products, and mobile contracts, underscoring the need for risk vetting and recurring payments.
South Africa already has a robust banking technology infrastructure, and the next step is broadening its accessibility. Success stories include nanolending, where a major South African telco developed a product for the underbanked using software from Finch Technologies. Other use cases involve digitising taxi finance collections and revolutionising merchant services and payments.
Lastly, open banking APIs empower financial institutions to develop personal finance management applications like Discovery Bank’s Vitality Money.
The path to success? Capitec offers an example of a bank that shifted away from relying solely on earnings from its lending business, instead boosting revenue from transactions. Could open banking be the next significant revenue driver for banks?
South African banks must actively participate, collaborate, and establish regulatory frameworks to secure a dominant position in the evolving financial landscape. Those who seize the initiative will gain a significant competitive advantage, while playing catch-up later will be challenging given the rapidly evolving customer behaviour.
- Christopher Ball is the co-founder of Finch Technologies. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views or positions of Ventureburn.
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