By Lucian Daia, CTO at Zitec

The traditional model of bundled financial services offered by banks that we’re all too familiar with is being increasingly revamped by a more specialised and tailored approach, driven by unstoppable tech advancements and regulatory requirements like PSD2 and looking even further ahead, PSD3.

This shift towards unbundling and open payments is perhaps poorly captured by the term ‘trend’. It seems like the genie is totally out of the bottle, becoming a permanent change, shaping how consumers and businesses are now interacting with financial services. Let’s break down the shift.

Breaking down unbundling

Unbundling refers to breaking down complete banking services, such as traditional checking accounts that combine features like deposits, withdrawals, bill payments, and access to savings or loans under one umbrella. These services are instead separated into distinct, specialised offerings, in order to gain greater flexibility and cost efficiency. This allows customers to select and pay only for the specific services they need, reducing overall banking costs and adapting more easily to their financial needs.

This approach allows consumers to cherry-pick services tailored to their specific needs, allowing for a more personalised and convenient financial experience, much like they expect when they’re browsing their favourite online stores. For example, this might look like using a digital wallet for everyday transactions, choosing ‘Buy Now Pay Later’ (BNPL) services for larger purchases, or using real-time payment systems for instant transfers.

Change starts with the consumer experience

The consumer stands at the heart of this transformation. Unbundling empowers individuals with greater control over their finances, enabling them to select services based on factors like cost-effectiveness, speed, and security. Digital wallets and mobile payment apps are a great example of this shift. In fact, 56% of consumers globally, revealed they use their digital wallet more frequently in the month than they use credit cards or conduct bank transfers. They provide users with instant access to their funds and the ability to conduct transactions anytime, anywhere in the world they may be. More than this, BNPL solutions cater to the evolving preferences of a digitally savvy demographic that values flexibility in payment options when pay-day hasn’t quite arrived yet, with 62% of consumers globally saying it could replace their credit cards.

Of course, the unbundling of payment services has been largely facilitated by the rise of open banking, a market now indicated to be worth as much as $164 billion by 2032, and which also had the consumer front of mind, mandating banks to share customer data securely with third-party providers via APIs. This not only increases competition but also stimulates innovation by enabling fintechs to create new services that seamlessly integrate into existing banking infrastructures. By using the power of open APIs, businesses can offer enhanced functionalities such as advanced data analytics, personalised financial advice, and automated savings solutions.

Impact on innovation

Unbundling also promotes competition where fintech start-ups and bigger players can innovate without the constraints of traditional banking models. This competition drives down costs, improves service quality, and fosters a culture of continuous improvement, which further benefits consumers and the businesses they engage with.

Regulations such as the Payment Services Directive 2 (PSD2) in Europe have also been instrumental. These regulations not only protect consumer rights but also spur collaboration between traditional financial institutions and agile fintech start-ups too, leading to the development of innovative payment solutions.

Collaborations facilitated by open banking APIs have led to the development of new payment solutions and we’re seeing that most payment service providers (PSPs) have started adding account-to-account as a payment channel. For example, the Netherlands native e-commerce payment system, iDeal, accounted for 70% of all e-commerce transactions in the Netherlands in 2022.

Call security! (or advanced data management)

However, with these opportunities come challenges, particularly in data management and security. As financial services become more interconnected through APIs, robust data governance and security measures become even more important.

Advanced data management techniques, including cloud-based analytics and machine learning, are crucial for processing vast amounts of transactional data securely while extracting meaningful insights to enhance service delivery and customer experience.

That’s why strategic partnerships and robust project management frameworks are crucial for successful implementation. These frameworks emphasise agility, scalability, and rigorous testing to ensure seamless integration of diverse systems and technologies.

So, what’s next?

From what we’re seeing, the unbundling of payment services and the rise of open payments represent a major transformation in the fintech sector.

By embracing modular financial solutions and leveraging open banking frameworks, businesses can unlock new opportunities for growth and differentiation. For consumers, this evolution translates into greater choice, enhanced financial control, and a more tailored user experience. As technology continues to evolve, so too will the possibilities for transforming how financial services are accessed and delivered, shaping a more connected and empowered global economy for those who choose to get started.