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Open banking breaks the data lock-in
The data lock-in
A history with a specific company cannot be transferred to somebody new, and incumbents have benefited from that inertia. Telecom and utilities work the same way. Once someone can connect the history from all their services and pass it on, the inertia drops and companies compete for the data.
Monetizing your own data
As a consumer you can also monetize it. You can take your historical information with a bank and offer it to someone willing to pay for it. Social media already does that without you deciding, and open banking turns it into a decision.
An oligopoly of banks
Banking worldwide is still an oligopoly. Five or six banks in the US own 60 to 70% of all assets, and Europe, Asia, and Latin America look the same. More competition means a less concentrated, more fragmented industry with lower fees and costs.
How does open banking move data between companies?
A customer approves a request, and the bank then shares account data with a licensed third party through a secure interface. Europe's second Payment Services Directive, known as PSD2, applied from January 2018 and required banks to open access to accounts on a customer's consent. The United Kingdom's Competition and Markets Authority ordered its largest banks to do the same that year. In Brazil, the central bank began its own Open Finance rollout in 2021.
Why does switching cost keep customers in place?
Economist Paul Klemperer wrote influential papers in the late 1980s showing that switching costs let companies charge higher prices to customers who are already locked in. Phone numbers were a famous example. The Federal Communications Commission required US wireless number portability in November 2003, which let people take their number to another carrier. Rules that make data portable work in the same way for banking.
Why do a few banks hold most of the assets?
Banking has high fixed costs for compliance, technology, and capital, and customers prefer institutions they trust. Larger banks spread these costs over more customers. Regulators also restrict who may open a bank, which limits new entrants. The Basel Accords, which set capital standards starting in 1988, apply to large international banks and shape how they compete.
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