Perspective Chapter: Open Banking – Collaborative Bridge to Increase the Economy of Scale and Scope of Banking

1. Introduction

The banking sector is undergoing significant change as a result of altered market conditions, the entry of new competitors and digital technologies, and a strong regulatory push. The banking industry is undergoing significant change as a result of shifting business models. The pipeline, a vertical paradigm of banking business models, may give way to open banking models, where banks may benefit from modularity [1]. Open banking is a growing trend in the financial sector, aiming to improve data sharing and efficiency. It empowers customers by granting them the rights to their data, a departure from traditional models [2]. The open banking market is experiencing rapid growth, which is being driven by the growing demand for personalized financial services and the increasing adoption of digital banking [3]. In 2023, the global open banking market was estimated to be worth USD 25.14 billion. It is anticipated to expand at a Compound Annual Growth Rate (CAGR) of 27.4% from 2024 to 2030 [4]. Approximately 19.7 percent of the worldwide open banking market’s revenue in 2023 came from the Asia-Pacific region. The open banking market in the Asia-Pacific region is anticipated to generate a projected revenue of USD 28,894.7 million by 2030. Expected growth in the Asia-Pacific open banking market is 28.7% on a compound annual basis from 2024 to 2030 [5].

From the standpoint of academics and business professionals, open banking seems to have distinct meanings. Open banking is a concept that enables financial institutions to generate productive innovations and provide customers with significantly better services by getting access to previously restricted customer data [2]. Open banking as a concept promotes competition in banking by sharing client data with competitors. In conclusion, despite the fact that there is a lack of consensus regarding the various components of open banking, it can be characterized as a generally regulated framework that allows banking customers to share their data with third parties, typically through standardized interfaces like application programming interfaces (APIs), in order to enhance competition in the financial sector. The proposed definition encompasses the eight elements identified in the proposed open banking integrated framework and can be interpreted as a generalization of all the analyzed fragmentary definitions [6]. Open banking is an emerging concept that has the potential to transform the financial services landscape and deliver superior value to customers [7].

Open banking is a collaborative framework wherein banking data is exchanged via APIs among two or more independent entities to provide improved functionalities to the market [8]. Open banking is a financial services framework that enables third-party developers to access financial data within conventional banking systems using APIs [9]. This paradigm fundamentally alters the manner in which financial data is disseminated and accessible [10]. Open banking is a technology-driven architecture for banking systems that enables safe data exchange between financial institutions and authorized third-party suppliers via secure APIs [11]. Finally, we can conclude that open banking is a regulated framework that allows secure data sharing between financial institutions and third parties via APIs, promoting competition and innovation in the financial services sector to enhance customer experiences. This is the definition used in this chapter, based on the ones mentioned above.

Indonesia is home to an astonishing 17,000 islands. With a population exceeding 273.5 million in 2023, the country is primarily populated by Generations Y and Z, who are known for their preference for mobile and prompt services. This demographic trend is closely linked to a significant shift toward digital engagement. Despite the fact that the country has a 56% internet penetration rate, approximately 92 million individuals are still unbanked, and approximately 46 million people are underbanked. Open banking presents an opportunity to increase financial literacy and promote financial inclusion throughout the nation [12].

The Indonesian Payment System Blueprint 2025 (BSPI 2025) includes open banking as a solution to address the challenges of the digital era in Indonesia. The Indonesian Payment System Vision 2025 is the final form of the Blueprint, and it is implemented through five initiatives: open banking, retail payment system, financial market infrastructure, data and regulation, licensing, and supervision [13]. The implementation of open banking solutions is a critical step toward the modernization and financial inclusivity of Indonesia. This profound transformation is being orchestrated by the strategic convergence of traditional financial institutions and cutting-edge financial technology (fintech) companies, which is granting Indonesian consumers enhanced access, convenience, and security [12].

Open banking introduces significant challenges to the traditional banking model, particularly the interplay between open banking and financial risk. Consumer education is essential in the context of open banking. Open innovation enables financial institutions to generate better services by getting access to previously restricted customer data. However, non-bank and fintech lenders often face significant barriers in accessing comprehensive customer data, restricting their capacity to support non-standard credit models. More emphasis is required to be assigned to research on the economic impact of open banking [2]. Open banking fosters competition, innovation, and enhanced consumer control over financial data, enabling access to a broader array of financial services and apps while upholding robust security protocols. Open banking seeks to augment transparency, elevate consumer experiences, and stimulate the creation of more tailored financial goods and services [11].

2. Traditional banking system: Pipeline-based approach

Banks traditionally play a critical role in the economy, despite the fact that the relative significance of the various functions of banks varies significantly across countries and eras, they are always essential to the financial system. Firstly, they enhance the information by monitoring the creditors and ensuring that the depositors’ funds are used appropriately. Secondly, they offer depositors protection against unforeseen consumption disruptions and intertemporal buffering of risk that cannot be diversified at a specific moment in time. Nevertheless, banks are susceptible to systemic risk and run due to the maturity mismatch between their assets and liabilities. Third, banks contribute to the expansion of the economy. Fourth, they play a significant role in corporate governance [14].

The selection of risk impacts banks’ production choices, including asset composition, asset quality, off-balance sheet hedging strategies, capital structure, debt maturity, and resource allocation for risk management, hence influencing banks’ costs and profitability [15]. The bank benefits from both general and product-specific economies of scale and scope, allowing for operational expansion at decreasing average costs [16]. Banks may compete with one another without altering their pricing via non-price competition [17]. This is one reason the conventional retail banking system is fundamentally centered on service provision. The value proposition encompasses limited branch and personnel services conducted at designated times, with service quality reliant on the qualifications and experience of bank staff [9].

Banks traditionally have maintained a monopoly on consumer transaction data; however, they have failed to capitalize on this wealth of data ownership [18]. In a frictionless environment, the Coase theorem suggests that data ownership is immaterial to achieving efficiency, as parties can negotiate the transfer of rights to those who can most effectively harness the data. However, in the practical context of real-world frictions, the ownership of data could be crucial, as banks may be motivated to hold this valuable resource, avoiding competition and fostering a data monopoly [2].

A complicated and dynamic regulatory structure that controls data ownership and privacy applies to the banking sector. Among the most important regulatory frameworks are the General Data Protection Regulation (GDPR), the Basel Committee on Banking Supervision 239 (BCBS 239), and the Payment Card Industry Data Security Standard (PCI DSS). GDPR is a global regulation that mandates that banks comply with rules governing data privacy. The Basel Committee on Banking Supervision has a rule called BCBS 239 that regulates risk data reporting and management. PSI DSS is a regulation that oversees payment security.

The approach of open banking addresses the question of data ownership, which is a thriving literature [2]. Efforts are being made by a number of nations and regions to decrease the ownership of data in the banking industry. Strong regulatory frameworks within Revised Payment Services Directive 2 (PSD2), which requires strict customer authentication, data protection, and security standards for both banks and third-party providers (TPPs), oversee open banking in the European Union. The redesigned PSD2 in the European Union (EU) seeks to enhance the accessibility and personalization of financial goods via open banking platforms [19]. Although there is not a specific regulatory framework for open banking in the United States, banking-related activities are governed by a variety of current financial regulations and data protection laws, including those enforced by federal agencies such as the Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Consumer Financial Protection Bureau (CFPB). In the United States, the Financial Data Exchange (FDX) is also significant. With the goal of creating the FDX API standard as a common interoperable data standard, the FDX is a non-profit organization composed of representatives from the biggest financial services companies in North America [11].

While Indonesia does not have an exact equivalent to PSD2, the country has implemented its own regulatory framework for payment services and fintech. Bank Indonesia has regulated electronic money (e-money) and mandated licensing and operational requirements for fintech companies (regulation number PBI No. 19/12/PBI/2017). Standardization and integration of payment systems across the country have also been regulated by Bank Indonesia through regulation number PBI No. 20/6/PBI/2018 concerning the National Payment Gateway. Furthermore, Bank Indonesia has also encouraged open banking through the BSPI 2025, which promotes collaboration between banks and fintech companies to drive innovation and financial inclusion. The Financial Services Authority (OJK) has issued several regulations to oversee fintech lending and other digital financial services, ensure consumer protection, and promote a safe and competitive environment. While not as comprehensive as PSD2, these regulations aim to modernize Indonesia’s payments ecosystem and drive innovation in the financial sector.

3. Reshaping banking system: Unbundling to re-bundling services

The sources of economies of scale and scope in banking can be broadly divided into four groups, economies of scale and scope related to reputation and branding, risk diversification, innovation, and information and communication technology (ICT) [20, 21]. Historically, banks have depended mostly on reputation and branding, as well as risk diversification, to enhance economies of scale and scope. Innovation, along with information and communication technology, has been utilized more internally. According to innovation and ICT, banking institutions have evolved consistently throughout time, and the major changes may be categorized into five main eras, analogous to the industrial revolutions: Banking 1.0, 2.0, 3.0, 4.0, and 5.0. Banking 5.0 will initiate a cultural shift for clients, necessitating a transformation from passive to preventive and proactive engagement, accompanied by an array of new services and products, innovative business structures, and a heightened focus on default prevention [9]. The extensive utilization of the Internet signifies the onset of the Fourth Industrial Revolution, characterized by the integration of industrial operations technology with information and communication technology. Industry 4.0 pertains to the amalgamation of the Internet of Things (IoT), the Internet of Persons (IoP), and the Internet of Everything (IoE). The Internet facilitates dependable communication across machines, individuals, and digital applications in real time and at little expense. This scenario facilitates the adoption of “smart banking” and enhanced digitalization inside and across organizations or service operation websites. This signifies Banking 4.0, a disruptive breakthrough akin to the preceding three revolutions [9].

The unbundling of traditional banking was a general trend in the industry in the late 2010s—services that were not “core” to what a bank could do alone were gradually moved to smaller, more specialized businesses that were champions of those services, and they provided the APIs for these services to the banks [22]. The early “unbundling” yielded several advantages in the reconfiguration of financial services [23]. Fintech broadens this notion to encompass various services, including firms focused on payments, card issuance, merchant acquisition, lending, customer support, chatbots, process automation, wealth management, account verification, customer reporting, fraud detection, and others, each offering an extensive array of APIs [22]. Following the emergence of “unbundling,” which facilitated the growth of fintech and compelled banks and financial institutions to enhance their innovation, the industry has recently observed a nuanced shift in the trend of new entrants competing with established financial institutions, accompanied by a growing sense of collaboration across the sector. The consequences of this current “re-bundling” are expected to be highly advantageous for the sector, promoting collaboration between fintech companies and conventional financial institutions [23].

Platform-based banks benefit from a two-way network effect, in which incremental customer growth attracts additional service providers and vice versa. To remain relevant in the new ecosystem, businesses will need to think beyond open banking and toward a shared marketplace future, and new specialist roles are emerging. These roles, which include supplier, aggregator, and orchestrator, are business case-specific rather than business model-exclusive. As a supplier, the bank focuses on developing products and services while outsourcing distribution to a third party. In its role as an aggregator, the bank delegated product and service creation to a third party while using internal channels for distribution. In the orchestrator role, banks act as facilitators of a marketplace for various FS and non-FS propositions, enabling beyond traditional banking with a broader service portfolio and client base (Figure 1).

Financial institutions controlled every facet of consumer data, goods, and services in the compartmentalized system of traditional banking. According to [25], this approach restricted innovation, competition, and customer-centricity while prioritizing institutional control. With little integration of third-party services, customers relied on their banks for all of their financial needs. The emergence of open banking marked a paradigm shift enabled by regulations like the European Union’s Revised PSD2 and the UK’s Open Banking Initiative. These frameworks mandated banks to share customer data (with consent) via secure APIs, allowing TPPs to develop innovative financial services [26]. Key outcomes include enhanced competition, customer empowerment, and technological integration. Fintech companies and startups are enhancing competition by leveraging bank data to offer personalized services (e.g., budgeting apps and loan comparisons). Users gain control over their financial data; this customer empowerment enables seamless account aggregation and payment initiation. By leveraging alternative data (e.g., utility payments), underserved populations gain access to credit and financial tools, which will ultimately increase financial inclusion.

The banking industry in Indonesia is now experiencing significant digital change, but within a restricted scope. The findings from the Bank Indonesia evaluation, Figure 2, indicate that several banks in Indonesia are beginning to use digital technology adoption to enhance their competitiveness and client services [27]. Two primary conclusions emerge: firstly, the majority of payment products created by national banks are in quadrant I (IT developed) and are transitioning toward quadrant II (digital banking 1.0). Secondly, the majority of banks in Indonesia remain in quadrant I. It has been determined that the BUKU 4 banks and many other large institutions are situated in quadrant II. No national bank has successfully entered quadrant III (digital banking 2.0). The adoption rate of digital banking by national banks remains comparatively sluggish. This circumstance was instigated by inadequate adaptability of infrastructure and domestic payment system rules, the banking sector’s sluggish reaction due to stringent restrictions, and elevated investment costs. The Indonesia Payment System Blueprint 2025 mandates national banks to best use breakthroughs in digital technology. In addition to the use of the Application Programming Interface (API), several forms of innovation are anticipated to facilitate banks’ transition into the digital-first banking age.

Digital-first banks function exclusively online, providing customers with banking services via a mobile application, website, or other digital platforms. They may provide convenience and reduced fees compared to conventional banks with physical locations [28]. Digital-first banks will be characterized by a number of trends, including personalization, mobile-first, AI and machine learning, real-time payments (RTPs), invisible banking, cryptocurrencies and blockchain technology, and a people-first approach. Banks will prioritize personalized experiences for their customers [29]. Banks will focus on mobile strategies to provide effortless digital experiences [29]. AI and machine learning will be more integrated into financial services, with generative AI enhancing customer service and predictive analytics improving fraud detection [30]. RTP will become more critical as consumers and businesses demand faster, more secure transactions [31]. Virtual assistants like Alexa, Google Home, and Siri will become more prevalent as invisible banking [32]. Cryptocurrencies and blockchain technology will be integrated into banking [33]. Banks will focus on exceptional engagement and empowerment of customers and bankers [34]. Banking is transitioning from a traditional model with economies of scale and conflict of interest to a new wave of third-party service bundling focused on customers [1].

The next generation of open banking is what is called open finance [35]. The concern extends beyond restricting access to banking accounts; it also encompasses mortgages, investment accounts, pensions, and insurance, provided they are all integrated into APIs [9, 35]. Customers may swiftly transfer funds across accounts and oversee their complete financial portfolio in a single centralized location [9, 35]. Capgemini [24] called open finance an open X, a concept of a transparent banking model that is centered on the sharing of data, assets, resources, and products throughout the banking industry. A crucial component in the process of integrating the economy and digital finance in Indonesia is the management and exploitation of data pertaining to digital payment systems [27]. A study examines the impact of a co-innovation platform between fintech and digital banks on company development in Indonesia. The study found that New Customer Base and New Customer Value are important components of the Co-innovation platform, which influences company development through radical and incremental innovation. The Open Financial System can be a form of collaboration that provides added value to both parties and has an impact on company development [36].

4. The new valuable assets in digital age: Data

Personal data transforms business boundaries, shifting profit pools to companies automating and mining data. However, the value and profit creators remain uncertain due to complex regulatory, business, and technological issues. In 2010, the World Economic Forum’s (WEF) Rethinking Personal Data project highlighted the rapid growth of personal data, promoting a user-centric data ecosystem based on trust and individual control in data sharing. The WEF report aims to create a user-centric data ecosystem based on trust and individual control over data sharing. It envisions a future where individuals have greater control over their data, digital identity, and privacy, and government agencies can exchange data more easily. The report highlights complex business, policy, and technological issues requiring coordinated leadership [37].

Personal data is transforming into a valuable economic asset, requiring a balanced ecosystem with increased trust between individuals, government, and the private sector to unlock its full potential. In the banking industry, the use of customer data is difficult and complicated due to the protection of customer data, which includes the protection of sensitive personal information provided by customers during transactions. Banks use various methods to protect customer data, including encryption, authentication methods, security policies, and fraud monitoring. Banks safeguard customer data by adhering to self-regulation and government regulations, complying with GDPR, and implementing cybersecurity measures to safeguard sensitive information and systems from unauthorized access.

Banks must be cautious with customer data, as it is expected to function as a secure data repository. To protect customers, rules on data protection, data exchange arrangements, and data governance in banking are crucial. Implementing these elements will increase public trust in banking, especially in the digital era, and ensure a wider range of uses for customer data. Data protection policy is a scheme regulating customer data collection, processing, and storage, involving several principles for Bank consideration, as illustrated in Figure 3 [38].

Banks must adhere to seven main principles when collecting and processing customer data (Figure 4). These include lawfulness, transparency, purpose limitation, data minimization, accuracy, storage form, and security. Personal data must be lawfully, fairly, and transparent, with a clear, explicit, and legitimate purpose. Data minimization ensures that data is adequate, relevant, and limited to the required amount. Accuracy must be constantly updated and stored in a form that allows identification of the data subject. Security measures include protection against unauthorized or illegitimate processing and accidental loss, destruction, or damage. Banks as data controllers must demonstrate compliance with these principles, requiring documentation, technical steps for organization and data protection, and the appointment of a data protection officer.

The bank must ensure lawfulness in processing personal data, obtaining consent from the data subject, executing contracts, fulfilling legal obligations, protecting vital interests, implementing public tasks, and fulfilling legitimate interests. Fairness requires the bank not to misuse or deceive individuals and transparency requires the bank to communicate clearly and honestly about how their personal data is used. This ensures compliance with laws, protects vital interests, and upholds the rights and freedoms of data subjects. Data standards for banks and fintech players will cover data types, technical specifications, security requirements, consumer consent, dispute resolution, API life cycle, and governing body standards. They will also outline principles for open API business contracts, including consent rules, access procedures, and risk management [27].

Indonesia’s financial sector is increasingly adopting open banking, which requires banks to share customer data with third parties. However, compliance with data privacy regulations (Figure 3), particularly the principles of data collection and processing issued by the OJK (Figure 4), poses significant challenges. One of the key issues is differentiating between personal data and aggregated or anonymized data. Below are the primary challenges and their implications for compliance:

5. The new way of collaboration: Open banking APIs

The origins of open banking are grounded in regulatory requirements and technological advancements, fundamentally altering the conventional interactions between corporate and individual clients and their banks [35]. APIs are the technology that underpins open banking. An API is a collection of functions that facilitate the exchange of data and requests between systems, typically in a secure and controlled manner [39]. Private, partner, and open APIs are the three main categories of APIs that are currently used in the open banking sector. Every kind of API has a distinct function and application as can be seen in Figure 5 [39, 40]. Open banking is made feasible by APIs. They guarantee that both parties can comprehend and collaborate with each other’s systems without the necessity of understanding the complexities of the other’s architecture. Banks can ensure that third parties have access to only the data they require and nothing more by implementing fine-grained controls over what data is accessible via APIs through the use of strict authorization mechanisms. APIs or API gateways typically include auditing capabilities that enable banks to monitor and trace data access. This feature assists in the identification of suspicious or unauthorized activity and the preservation of a record of the data accessed and the time it was accessed [11].

Bank Indonesia, Central Bank of Indonesia, promotes the participation of the industry in shaping the trajectory of open banking development within Indonesia’s payment system by engaging in the formulation of Open API Standards and facilitating connections between banks and financial technology (fintech) entities. This engagement is achieved by allowing industry and the public to contribute feedback and responses to the Consultative Paper on Open API Standards concerning Open Banking and the integration of banks with fintech for payment system service providers. The Open API standard enables banks and fintech companies to mutually access financial data and information pertaining to customer payment transactions, adhering to the principle of equality. This is further substantiated by contractual collaboration regarding the utilization of open API technology (open API).

As part of the aspirations for the Indonesia Payment System 2025 (IPS 2025), Open Banking is intended to foster digital transformation within the banking industry and to establish interlinks between financial institutions and fintech companies. This goal was brought to fruition via the First Initiative, which was Open Banking. Another conclusion that has been reached in the past is that the implementation of open banking in Indonesia has not yet been proceeding on an optimal basis. When it comes to contractual, technical, and security-related matters, the use of APIs tends to vary and is not standardized like other APIs. Additionally, it is done in a restricted scope with certain contract schemes, both of which are often bilateral and are accomplished via the use of open partner API [27]. As a result, the Open API standard is on one of the Working Groups’ key discussion topics for IPS 2025 [27]. The ultimate goal of Open Banking is to promote the Open API standard, which encompasses technological requirements, security standards, data standardization, and governance. To serve as a roadmap for banks and fintech companies adopting Open Banking, the standard will be described in guidelines (Figure 6).

Integration with local digital platforms, provision of financial services through banking agents, and development of personalized microfinance products are all part of open banking’s role for Indonesia’s unbanked and underbanked.

6. Challenges and opportunities

Open banking is revolutionizing financial services by enabling third-party developers to access bank data through APIs. However, it presents challenges such as security, privacy, and regulatory compliance issues. Collaboration among stakeholders is crucial for addressing these risks, while implementation challenges include cybersecurity threats, regulatory compliance, and low adoption due to poor consumer education. Open banking success relies on customers’ willingness to share information, and regulators must foster an environment that supports its growth, as customers greatly benefit from this financial ecosystem [41]. Open banking presents both benefits and challenges, according to the findings of a survey of many linked literatures [42, 43, 44].

7. Conclusions

Banks have historically held a significant role in the economy, but their data ownership has been a challenge. Open banking addresses this issue by reducing data ownership in the banking industry. The unbundling of traditional banking services in the late 2010s led to the growth of fintech and a shift in competition between fintech companies and traditional institutions. This “re-bundling” is expected to be beneficial for the sector, promoting collaboration between fintech companies and conventional financial institutions.

The next generation of open banking is open finance, which is a transparent banking model that focuses on sharing data, assets, resources, and products throughout the banking industry. A study in Indonesia found that the co-innovation platform between fintech and digital banks significantly influenced company development through innovation. The Open Financial System can provide added value to both parties and impact company development.

Open banking is revolutionizing financial services by allowing third-party developers to access bank data through APIs. However, it presents challenges such as security, privacy, and regulatory compliance issues. Collaboration among stakeholders is crucial for addressing these risks. Implementation challenges include cybersecurity threats, regulatory compliance, and low adoption due to poor consumer education. Open banking success relies on customers’ willingness to share information, and regulators must foster an environment that supports its growth. Overall, open banking is revolutionizing financial services by enabling third-party developers to access bank data through APIs.

Open banking is transforming the financial sector by empowering users with control over their data, resulting in enhanced personalization of services, improved financial inclusion, and heightened innovation. In Indonesia, it provides an effective means to engage the unbanked, bolster small enterprises, and enhance the accessibility and relevance of financial services. Open banking fosters collaboration among banks, Fintechs, and other providers, thereby enhancing the scope and diversity of available services, while data-driven tools augment efficiency and customer experience. To fully attain these advantages, Indonesia must also confront significant challenges in regulation, data protection, and digital infrastructure. With appropriate support, open banking can facilitate inclusive growth and empower individuals across all societal strata.

This study examined the regulatory landscape, benefits, technological drivers, risks, and global conditions affecting the development of open banking in Indonesia. Based on these themes and adapted to the Indonesian context, there are numerous research questions to be addressed in the future. How can open banking help bridge the gap for Indonesia’s unbanked and underbanked communities? What types of public-private partnerships are most effective in advancing open banking innovation in Indonesia? What is the effect of open banking implementation on the growth of financial services? How can Indonesian banks and fintech companies collaborate to create mutually beneficial open banking platforms? How can Indonesia’s current digital identity systems be integrated with open banking to improve onboarding processes?