Breaking the Boundaries in the Digital Age: Open Banking and Tax Evasion

Abstract

In this paper, we examine the relationship between open banking and tax evasion. As the open banking literature is still evolving, we try to systematically analyze the literature on conventional banking and tax evasion and then extend the discussion in the context of open banking. The popularity of open baking recently raises a question about its relationship with tax evasion. Digital banking and digital taxation contributed positively to mitigating tax evasion in the context of conventional banking. However, in open banking, the customers can decide to what extent they will share any transaction-related data with their bank, while they can also choose to complete direct transactions with third parties. This creates a new challenge in relation to the mitigation of tax evasion, which is the focus of this paper. Due to lack of granular empirical data, we conduct a systematic literature review and a bibliometric analysis to track the development of the relevant academic debates and identify the arguments that have been presented in relation to this topic. This approach is recognized as well suited for emerging topics in finance research, particularly when data are scarce, as evidenced by studies on COVID-19 and biodiversity. We find that the gaps of the current regulatory framework, at both the national and supranational level, have created challenges and uncertainties at multiple levels. Nonetheless, the findings of the study suggest future research directions and offer valuable guidelines for regulators in utilizing open banking.

1. Introduction

In the present open data economy, ownership of consumer data has shifted from banks to consumers. It is possible for customers to maintain ownership of their data as the open Application Programming Interfaces (APIs) in an “open banking” system allow banks to connect with other institutions. Open banking is a groundbreaking concept that has garnered global attention for its potential to revolutionize the financial services industry by gearing the market’s competition, particularly in payments (Zetzsche et al. 2020) and bank lending (Fang and Zhu 2023; He et al. 2023). It represents a paradigm shift in the traditional banking model, where customers’ financial data are securely shared with third-party providers through APIs.

Recently, open banking has gained momentum as a transformative force that fosters innovation, enhances customer experiences, and promotes financial inclusion. Higher control of one’s own data, and secure transmission of data to a third-party service provider (TPP), after being authorized by the customer, makes open banking very popular (Balyuk and Davydenko 2023). Financial institutions use APIs alongside TPP to connect their services in the applications used by their customers (He et al. 2023). Between 2023 and 2027, it is expected that there will be a 500% growth in the value in open banking transactions, which is equal to around 330 billion U.S. dollars (Statista 2023). Some markets are highly engaged in open banking, which is mainly because of higher digital access. In addition to the digital readiness of banks, financial service providers and their customers, the operational framework of the regulatory system plays an important role. For example, the Venmo app in the US lead to an increase in customers from 10 to 40 million in two years, followed by 100% in the next 3 years (Curry 2024).

The considerable increase in the adoption of open banking has a positive impact on economic development. Individuals obtain quick and quality services, companies are able to match the preference of their customers once they obtain access to relevant information and can generate higher revenue for their business by catering to the needs of society in a more efficient way (Lee and Shin 2018; Singh et al. 2020). Moreover, the open banking system has created opportunities of quick payment transaction and a high possibility of mapping demand and supply in the market in a timely manner. Thus, a coordinated approach by different sectors toward open banking is leading the economy forward and paves the way toward future development.

However, the popularity of open banking invites several challenges associated with data privacy and data safety (Thakor and Merton 2019; Jünger and Mietzner 2020). As BIS has warned: “…banks and bank supervisors will have to pay greater attention to risks that come with the increased sharing of customer-permissioned data and growing connectivity between banks and various parties (BIS 2019)”. Therefore, it comes as no surprise that the adoption of open banking remains limited with a noticeable difference between developed and developing markets. In developed markets, almost 38% of bank consumers use technology-led products and digital services, and 60% of the population use it as a tool in a multichannel set-up (Singh et al. 2020). For instance, a recent survey from the United Kingdom’s Financial Conduct Authority (FCA) shows that the majority of consumers are switching away from traditional channels in favor of digital solutions in banking and payments with almost nine in ten (88%) adults banking online or using a mobile app in 2022—up from 77% in 2017 (FCA 2023).

However, a small portion of society still favors the traditional banking infrastructure, where they prefer to visit the bank branch in person. In fact, the FCA’s survey indicates that cash remains a vital payment method for over three million people, including the most vulnerable in society (FCA 2023). Thus, the adoption of open banking is not always easy to be measured with accuracy. As all banks want to maintain a good relationship with their customers for their own growth and for the development of the economy as a whole, they prefer to follow an omnichannel model where technology-led products and services are available through different channels alongside the open banking platforms. For the rapid adoption of open banking, an efficient regulatory system is required to create enough trust among customers to share their data with their bank in order to obtain better services aligned with their preferences and expectations. Incumbent banks can effectively sustain customer relationships and emerge victorious in the era of open banking by focusing on enhancing their leadership and culture, refining their data utilization capabilities, and embracing automation opportunities.

The original idea in our research is to provide a comprehensive overview of the major tax evasion issues associated with traditional banking. Subsequently, we examine these concerns in the context of open banking to evaluate how open banking might potentially address or exacerbate these issues. In traditional banking, we observe serious concerns about tax evasion, and the literature explains the adverse impact of tax evasion and its effects on economic growth (Khaltar 2023). Specifically, we find that key issues related to tax evasion are bank secrecy, exchange of information, tax havens, offshore banking or the development of digital finance and cryptocurrencies (Johannesen and Zucman 2014; Chernykh and Mityakov 2017; Menkhoff and Miethe 2019; Kwon et al. 2022; Ylönen et al. 2023). The current banking system may impede the investigation of tax evasion related to income diversion activities due to a lack of data to track the final recipients (Mironov 2013). Additionally, it seems that it is not always possible to detect and trace tax-eroded transactions, which end up becoming invisible or falling through the cracks of the system (Mpofu 2022). Some researchers have engaged in a long and heated debate on tax avoidance and banking activities, and often tax avoidance is linked or even confused with tax evasion (Hasan et al. 2014; Isin 2018; Joshi et al. 2020; Shevlin et al. 2020; De Vito and Jacob 2023). Both tax evasion and tax avoidance have serious economic implication. So, we try to capture the literature on both and its impact on conventional banking. In open banking, there is a high possibility that tax avoidance can be mitigated because of the presence of technology. But the implication of tax evasion is unknown. To the best of our knowledge, we cannot find any detailed discussion about the impact of tax evasion within an open banking setup. Our work represents original research that first delves into the relationship between open banking and tax evasion.

Therefore, in this paper, we aim to fill in this gap in the literature and ask the following question: What are the challenges posed by the utilization of open banking, and what opportunities have arisen in relation to tax evasion? In simple words, we aim to examine whether and to what extent the tax evasion problem could be exacerbated through the introduction of open banking. To offer an answer to this question, first we conducted a critical evaluation of the existing literature related to conventional banking. This examination allowed us to understand better the relationship between conventional banking and tax evasion (Johannesen 2014; Chernykh and Mityakov 2017). Against this backdrop, we examined 334 papers and have grouped them in four clusters. Within these clusters, we identify keywords relevant to each cluster. In summary, in the context of conventional banking and tax evasion, we found keywords focusing on the following research themes: Data and Information; Jurisdiction; Financial Development and Tax-Driven Financial Strategies. Subsequently, we used the cluster-specific keywords relevant to tax evasion to determine whether they were also present in the context of open banking. As such, we examined 124 papers and found that the relevant articles mainly focus on Data and Information, Digital Finance and Payment and Regulations. This examination provided the basis for furthering the discussion in relation to the current policy debate and the co-relation between open banking and tax evasion. Given that open banking is an emerging area in finance research, a systematic literature review and bibliometric analysis are considered appropriate methods for identifying challenges, key research themes and future research directions. The above methods are particularly effective for research topics with limited empirical evidence (Roberts et al. 2021; Boubaker et al. 2023).

Specifically, it is evident that open banking increasingly attracts attention and popularity, encourages innovation, and ultimately promotes competition. However, there are still several unresolved issues regarding the design, the structure and the application of the relevant regulatory framework. Indicatively, we cannot overlook the challenges related to data privacy, resistance from financial institutions, and the need to ensure effective compliance and oversight. Therefore, although it is rather early to talk about the development of global standards for regulating the open baking system (Lee and Shin 2018), it is imperative that careful considerations are made in order to address the gaps of the current open banking framework. We argue that while open banking looks promising as a tool in the global fight against tax evasion, its practical implementation requires a careful consideration of privacy, security, and regulatory challenges. A concerted effort involving international cooperation and technological advancements is necessary to leverage the full potential of open banking for this purpose.

The rest of the paper is organized as follows: In the next section, we explain the methodology followed by the results of our research. Finally, we contribute to the policy direction that should be followed in the next few years, linking the focus of this research with the practical implications that can be observed in the areas of open banking and tax evasion.

2. Methodology

In this study, we employ a systematic literature review (SLR) and bibliometric analysis to examine the existing evidence about any association between open banking and tax evasion (Tranfield et al. 2003; Fatima and Elbanna 2023; Lim and Weissmann 2023).

Due to the limited literature on open banking, especially on the interplay between open banking and tax evasion, we start with the existing literature on conventional banking and tax evasion. This keyword search approach is popular in finance research, particularly in addressing emerging topics with limited evidence. For example, there is study by Boubaker et al. (2023) related to COVID-19 and finance as well as the studies of Roberts et al. (2021), Hutchinson and Lucey (2024) on biodiversity accounting and finance.

The literature recognizes open banking as a phantomization of the banking industry (Briones de Araluze and Cassinello Plaza 2022). The aim of this exercise is to first identify the thematic streams, current challenges and the relevant keywords within each major cluster related to conventional banking and tax evasion. Later, we connect these keywords from each cluster with the latest academic evidence within the context of open banking. Subsequently, we critically discuss whether the current disadvantages of traditional banking and tax evasion could be mitigated because of the adoption of open banking or whether it will create new challenges in the fight against tax evasion.

Thus, we combine SLR (Mahran and Elamer 2023; Roberts et al. 2021) with bibliometric analysis (Bahoo 2020; Hussain et al. 2023; Yan et al. 2024) for a comprehensive review (Mustafa et al. 2022; Boubaker et al. 2023).

2.1. Systematic Literature Review: Conventional Banking and Tax Evasion

2.1.1. Sample Selection

To identify an appropriate and robust sample for the SLR, we adhere to the Preferred Reporting Items for Systematic Reviews and Meta-Analysis approach (PRISMA) (Moher et al. 2009) and the systematic process in management (Tranfield et al. 2003). The selection of peer-reviewed journals is conducted with a view to ensure high-quality search results. We emphasize the use of the Scopus database as it provides the advantage of supplying a diverse range of metrics within the Economics and Finance themes, contributing to more comprehensive and nuanced results due to its extensive coverage (Corbet et al. 2019; Yan et al. 2024).

The focus on this research is on open banking and tax evasion; hence, we start the literature search by identifying two sets of keywords. The first set focuses on “open banking” and the second focuses on “tax evasion”. However, it is worth recognizing that as open banking is a very contemporary topic, the relevant literature is still limited and the definition remains ambiguous; it has been accompanied by a scarcity of academic evidence thus far (Briones de Araluze and Cassinello Plaza 2022). To the best of our knowledge, there is no evidence of discussion between open banking and tax evasion in the literature. Therefore, we start the SLR process with keywords relevant to conventional banking and tax evasion in the title, the abstracts and the keywords of the published papers. (Ibrahim et al. 2022; Boubaker et al. 2023; Mahran and Elamer 2023; Yan et al. 2024).

We started by collecting papers from all years in the database (Mahran and Elamer 2023). We identified 669 articles related to both ‘banking’ and ‘tax evasion’ from ‘Economics, Econometrics and Finance’, ‘Social Sciences’, ‘Business, Management and Accounting’, ‘Computer Science’, ‘Environmental Science’, ‘Engineering’, ‘Decision Sciences’, ‘Arts and Humanities’, ‘Mathematics’, ‘Psychology’, and ‘Multidisciplinary’. The wider subject areas are considered to ensure that no relevant articles are overlooked, as the manifestation of tax-evading behavior might be associated with psychological studies, or the encouragement of tax evasion within the banking sector could be attributed to deficiencies in the information systems of the banks.

Following the screening process mentioned in Figure 1, the final sample comprises 334 papers, wherein duplicates or inaccessible articles are excluded, along with any studies lacking a central emphasis on tax evasion and banking. The volume of published outputs has significantly expanded from 2010 until the present day as demonstrated in Figure 2, and interestingly, 90 percent of the most cited papers has been written within this timeframe. This can be explained by the enactment of various legislative and regulatory frameworks focused on information exchange, such as the United States’ Foreign Account Tax Compliance Act (FATCA) enacted in 2010, the Automatic Exchange of Financial Account Information (AEOI) that the Organization for Economic Cooperation and Development (OECD) laid out in 2010 or the EU Directive on Administrative Cooperation (DAC) adopted in 2011. Figure 3 explains the geographical distribution of the related papers. The darker the color on the map, the more research outputs have been produced in the countries. The color distribution confirms the point made above that the enactment of legislation has led to an increase in the volume of publications.

2.1.2. Clusters Identification and Analysis: Conventional Banking

A comprehensive visual analysis is conducted utilizing the user-friendly and popular VOSviewer software (Version 1.6.19) to investigate abstracts of existing publications to affirm the research thematic cluster (Lu et al. 2022; Mahran and Elamer 2023; Bahoo 2020; Mustafa et al. 2022; Alaamri et al. 2023). This analytical approach aims to explain the discernible density of evidence gleaned from a compilation of 334 articles considered within the scope of this study. The ensuing discourse presents two illustrative depictions, namely, term co-occurrence maps derived from textual data (Figure 4) and authors’ keywords occurrence (Figure 5) (Alaamri et al. 2023).

The term co-occurrence map delineated in Figure 4 is generated through an application of full counting methodology, accounting for terms recurring with a frequency threshold of 10 occurrences or more within the Title and Abstract fields of the selected articles. Furthermore, an additional facet of keyword visualization is undertaken, specifically focusing on keyword co-occurrence, wherein a minimum threshold of 3 appearances is employed (Figure 5). The threshold number of terms and keyword occurrences is determined based on the size of authors’ keywords found with thresholds of 10 and 3, respectively.

The systematic categorization of extant evidence into distinct clusters is detailed in

Table 1. Research clusters on conventional banking and tax evasion. Source: derived by authors.

Clusters with Suggested Keywords	Key Literature
Tax Evasion
A. Data and Information i. Data and Information Exchange ii. Bank Secrecy iii. Risk	Tax Evasion and Inequality—(Alstadsæter et al. 2019) The End of Bank Secrecy? An Evaluation of the G20 Tax Haven Crackdown—(Johannesen and Zucman 2014) Transparency and Tax Evasion: Evidence from the Foreign Account Tax Compliance Act (FATCA)—(De Simone et al. 2020) Swiss banking secrecy and the problem of international cooperation in tax matters: A nut too hard to crack?—(Emmenegger 2017) Tax evasion, the underground economy and financial development—(Blackburn et al. 2012)
B. Jurisdiction Tax system Perception Cross-border Financial crime Tax burden Tax havens Offshore finance	The anatomy of the Cayman Islands offshore financial center: Anglo-America, Japan, and the role of hedge funds—(Fichtner 2016) Mobile people, mobile capital and tax neutrality: Sustaining a market for Offshore Finance Centers—(Rawlings 2005) Offshore schemes and tax evasion: The role of banks—(Chernykh and Mityakov 2017)
C. Financial Development Fintech Bitcoin Cryptocurrency Cryptocurrencies CBDC Payment Transaction Blockchains Financial development	The use of cryptocurrencies in the money laundering process—(Albrecht et al. 2019) Central bank digital currency, tax evasion, and inflation tax—(Kwon et al. 2022) Cryptocurrencies and Decentralized Finance (DeFi)—(Makarov and Schoar 2022) From tax havens to cryptocurrencies: secrecy-seeking capital in the global economy—(Ylönen et al. 2023)
Tax Avoidance Specific Cluster
D. Tax-Driven Financial Strategies Corporate tax avoidance Cost Debt Borrower Tax rate	Beauty is in the eye of the beholder: The effect of corporate tax avoidance on the cost of bank loans—(Hasan et al. 2014) Corporate tax avoidance and debt costs—(Shevlin et al. 2020) Taxes and Financial Constraints: Evidence from Linguistic Cues—(Law and Mills 2015) Does Public Country-by-Country Reporting Deter Tax Avoidance and Income Shifting? Evidence from the European Banking Industry—(Joshi et al. 2020)

. In this section, we define the main discussions around tax evasion and conventional banking. The cluster keywords would be utilized for the next section of the open banking analysis. This approach aims to establish a cohesive linkage with the prevailing research evidence within the area of open banking.

Over years, the differences between the concepts of tax evasion and tax avoidance are becoming blurred, and both are considered unlawful under tax exploitation schemes (Mclaren 2008). Thus, in addition to the shared clusters labeled as A, B, and C, we have identified another specific cluster related to the link between tax avoidance and banking (highlighted yellow section in Figure 4). We refer to this specific group as Tax-Driven Financial Strategies.

A substantive and noteworthy stream of the literature delves into topics, such as the impact of corporate tax avoidance on debt costs and bank loans (Hasan et al. 2014), the influence of exogenous bank liquidity shocks to tax strategies from the study of effective tax rates (Law and Mills 2015) or the analysis of how EU banking country-by-country requirements affect tax avoidance (Joshi et al. 2020).

A breakdown of publication outputs and citations from four distinct clusters (

Table 2. Citation efficiency in research output. Source: derived by authors.

	Publications	Cited	% Publications	% Cited	Citations per Publication
Cluster A. Data and Information
i. Data and Information Exchange	90	1409	26.9	38.8	16
ii. Bank Secrecy	16	356	4.8	9.8	22
iii. Privacy and Risk	70	1135	21.0	31.3	16
Cluster B. Jurisdiction	128	1788	38.3	49.3	14
Cluster C. Financial Development	102	989	30.5	27.2	10
Cluster D. Tax-Driven Financial Strategies	102	1432	30.5	39.4	14

) and bibliographic coupling by country (Figure 6) offers insights into the prevailing interest density within the literature connecting tax evasion and conventional banking. Evidently, information exchange and concerns related to privacy and risk share a similar level of focus, whereas attention toward bank secrecy appears to be comparatively lower (Alstadsæter et al. 2019).

Cluster A. Data and Information Cluster. Data and information sharing remain pivotal in tackling tax evasion in the existing literature. Financial institutions uphold bank secrecy and limit access to customer information in order to safeguard their client interests and ensure confidentiality. This practice is notably pronounced in jurisdictions identified as tax havens, such as Switzerland, Singapore, and the Cayman Islands, where policies supporting the wealth management sector may potentially facilitate tax evasion (Johannesen and Zucman 2014).

Despite the OECD and G20’s efforts to establish transparency in the information exchange regimes, there have been problems, concerns and resistance from specific countries, particularly those benefitting from retaining the current system, such as Switzerland and the Cayman Islands. As a result, there are significant difficulties and barriers hindering the investigation of tax evasion cases given the lack of a single comprehensive system of capturing and sharing all necessary information (Alstadsæter et al. 2019).

The increasing demand for a global information-sharing platform triggered the implementation of the OECD’s automatic exchange of information (AEoI) through the Common Reporting Standard (CRS) initiative in 2014 or the enactment of the Foreign Account Tax Cooperation Act (FATCA) by the United States in 2010. While Lips (2019) argues that these developments represent an improvement in the efforts to reduce tax evasion, other research raises concerns about the advantages of existing information exchange frameworks (Dharmapala 2016; Menkhoff and Miethe 2019; Ahrens et al. 2022). These concerns are attributed to emerging instances of concealed tax evasion or growing cross-border tax evasion among residents of foreign countries induced by the unilateral application of the US FATCA regime.

In our sample, 16 publications focus on bank secrecy, with significant attention dedicated to studies centered on Swiss banks, which are exemplified by the contributions of Johannesen (2014) regarding tax evasion and bank deposit behavior as well as Emmenegger (2017) exploring international tax cooperation. The citation efficiency within this sub-cluster is the highest with 22 citations per document. This clearly highlights the enduring research interest in relation to the issue of bank secrecy within the areas of both banking and tax evasion.

Cluster B: Jurisdiction. To address tax evasion, another challenge involves mitigating jurisdictional differences and the resistance that is observed particularly from certain offshore financial centers (Crasnic 2022). The adoption of a globally standardized framework in the banking and finance industry is essential to combat tax evaders who exploit gaps and loopholes found in national tax systems (Sharman 2017). In their attempt to bypass the procedures that are designed to add a level of transparency in the exchange of information, tax evaders even take advantage of foreign investment policies by acquiring new citizenships to conceal their offshore assets (Langenmayr and Zyska 2023). In general, regulators and policymakers seem to be always one step behind the tax evaders, and that is why it is not easy to eliminate these practices without the engagement and political will from all interested parties. Due to the strong international and cross-border elements involved, it is imperative to have international cooperation to address the gaps that exist in the legislative and policy frameworks around the world to mitigate the effect of tax evasion activities. Country-by-country reporting is a successful illustration of multinational cooperation within EU tax systems, which is aimed at enhancing tax transparency and consistency (Brown et al. 2019; Overesch and Wolff 2021). This practice provides tax authorities with a comprehensive overview of the global operations of multinational companies (MNCs) and can help in the prevention of profit shifting to tax havens.

The OECD has highlighted the importance of creating an international regulatory cooperation strategy in order to streamline and coordinate the national and international regulatory initiatives against tax evasion (Hamilton 2021). Specifically, the OECD has signified how international regulatory cooperation between tax authorities has resulted in limiting tax evasion. To this end, the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes, facilitated through the OECD Model Tax Convention (OECD 2019), has enhanced transparency in tax matters by introducing an automatic exchange of information between tax administrations. The need for international cooperation on tax was recently debated in the UN General Assembly with the Second Committee of the UN General Assembly voting in favor of bringing international tax cooperation at the United Nations (UN 2023).

Cluster C Financial Development. A highly academically appealing research theme within the realm of banking and tax evasion focuses on fintech and cryptocurrencies and payment innovation, and in this study, we refer to it as financial development. Firstly, the literature on cryptocurrencies is divisive regarding the benefits and drawbacks of facilitating tax evasion, with considerations extending to the nature of digital coins, as discussed by Jozipovic et al. (2022). Studies emphasize the utilization of cryptocurrencies as a means to transfer illicit earnings globally, exploiting the absence of effective governmental oversight (Albrecht et al. 2019), and express concerns about the level of tax compliance associated with this particular type of currency (Makarov and Schoar 2022).

With financial development, the discourse surrounding payment innovation in the context of tax evasion is a well-explored aspect. The focus primarily revolves around the impact of the non-cash economy, demonetization, and the promotion of cashless payments in supporting tax monitoring, mitigating tax evasion, observing the underground economy, and understanding how cash-holding characteristics facilitate tax crimes (Snellman et al. 2001; Zabyelina 2015; Chodorow-Reich et al. 2020; Scarcella 2021; Giammatteo et al. 2022; Monye 2023; Rainone 2023). The majority of the research concurs on the advantages of payment innovation and a cashless economy in aiding the fight against tax evasion. Payment innovation is expected to enhance the monitoring of all transactions related to tax issues.

Cluster D: Tax-Driven Financial Strategies. We observe a significant body of literature focusing on tax avoidance, tax aggressiveness or tax planning and their interaction with corporate financial strategies regarding banking activities. This cluster has garnered high interest, with many existing studies published in high-ranked finance-oriented journals. Within this cluster, there are subsets aimed at elucidating the connection between tax avoidance and debt cost, as evidenced by research conducted by Hasan et al. (2014); Beladi et al. (2018); Isin (2018); and Joshi et al. (2020). Additionally, we identify a recent trend in the literature that explores the intersection of tax planning and banking characteristics, such as EU banking regulatory reporting, liberalization, and market consolidation in this industry (Overesch and Wolff 2021; Chen et al. 2022; Kim et al. 2023). Therefore, we propose future research that delves into this connection within the context of open banking.

2.2. Systematic Literature Review: Open Banking and Tax Evasion

2.2.1. Sample Section

Building upon the clusters defined in the preceding sections, a subsequent inquiry is conducted to systematically explore the literature pertaining to “open banking” aligning with the four clusters mentioned above. The criteria for filtering articles (187 documents with keyword “open banking”) remain consistent with those applicable in the examination of conventional banking, encompassing published works, such as articles, book chapters, books, and reviews, while expressly excluding “gray literature”. Selected articles are all written in English on the relevant subject areas, and the inquiry happens in the Scopus database. The cumulative count of articles identified within the specified keyword parameters was 130, and after the screening process, 124 articles were finally included.

We follow the same PRISMA approach in this section on open banking (Figure 7) and also provide a term co-occurrence map based on text data (Figure 8). To avoid any omissions related to open banking, we exclusively use the keyword “open banking” in our search sample.

2.2.2. Mapping Studies on Conventional Banking-Tax Evasion to Open Banking

Due to the lack of evidence regarding tax evasion in open banking studies, in this section, we map keywords that are proxies for the four major clusters in studies of conventional banking–tax evasion, aligning them with the existing works on open banking (124 articles), as illustrated in Figure 9. Furthermore, when investigating existing open banking studies, we found that the major distribution of research is centered on the markets of the UK, Europe, and Australia (Figure 10). This aligns with the current status of open banking practices implementation at the global level, which is predominantly concentrated in these markets.

2.2.3. Cluster Identification and Analysis: Open Banking

The keyword-occurrence analysis is conducted using VOSviewer, and it is evident that the predominant thematic focus in academic debates on open banking revolves around the topic of data sharing, which leads to the development of new business models and regulatory frameworks for its implementation.

Firstly, with a reliance on the concept of data sharing, the majority of existing studies are mostly centered on the theme of data and information sharing. This functionality of open banking facilitates the development of new business models, enhancing competition levels and supporting new entrants in the financial services sector (Zetzsche et al. 2020; Fang and Zhu 2023; He et al. 2023). Simultaneously, there are also studies that delve into the challenges concerning data privacy, the relevant security risks and the strategies for the mitigation of such risks (Mansfield-Devine 2016; Wang et al. 2020; Liao et al. 2022).

Furthermore, open banking requires a comprehensive framework not only at the legislative level but also at a policy level, considering its current early stage of development. Research within this thematic cluster is geared toward exploring rules and regulations as well as commonly acceptable standards for data sharing and fostering competition, as evidenced by works such as those by Borgogno and Colangelo (2020), Dinçkol et al. (2023), and, in the field of regulatory technologies (RegTech), Buckley et al. (2020).

Indeed, the identification of empirical evidence linking open banking with the keywords derived from Cluster B (Jurisdiction) proved to be infrequent in our analysis. In fact, we have found only four papers within open banking studies with keywords related to tax (tax systems, tax jurisdictions, tax burdens, tax havens), offshore finance, financial crime or cross-border. However, all the research content is not related to our focus. Subsequently, based on the discerned patterns illustrated in Figure 9, an alternative thematic cluster, denoted as regulation for open banking, is proposed for consideration.

We find that open banking poses both opportunities and challenges in mitigating tax evasion, especially concerning the concept of data sharing. There are 23 articles discussing this topic, while 30 articles also address concerns about data privacy and data risks. Both of these issues constitute a significant portion of the wealth of studies on tax evasion under traditional banking, as discussed in previous sections.

Within the recent technological development, such as fintech, blockchain systems, and payment innovation, we see a high potential for open banking to introduce many new business models to support tax evasion monitoring. Approximately half of the selected existing studies (51 articles) on open banking focus on cryptocurrencies, fintech, and blockchain. This would address the increasing demand for financial development and payment innovation stemming from tax evasion studies. However, the lack of a comprehensive legislative framework is a challenge on its own for open banking, which is evidenced by the numerous studies in this cluster (37 articles on regulation and legislation clusters).

2.3. Bibliometric Analysis

In this section, we adopt a bibliometric approach as followed in finance research (Zhang et al. 2019; Bahoo 2020; Hussain et al. 2023; Yan et al. 2024), and we utilize a mixed approach of SLR and bibliometric analysis (Mustafa et al. 2022; Boubaker et al. 2023). The purpose of the findings in this section is to reinforce our previous results in the SLR section.

2.3.1. Output and Citation Analysis

Table 3. Top 10 cited articles and books in tax evasion-conventional banking research. Source: derived by authors.

No.	Article Titles		Year	Journal		Cited
1	Beauty is in the eye of the beholder: The effect of corporate tax avoidance on the cost of bank loans		2014	Journal of Financial Economics		263
2	Tax evasion and inequality		2019	American Economic Review		158
3	Taxes and Financial Constraints: Evidence from Linguistic Cues		2015	Journal of Accounting Research		153
4	The end of bank secrecy? An evaluation of the G20 tax haven crackdown		2014	American Economic Journal: Economic Policy		150
5	Tax evasion, the underground economy and financial development		2012	Journal of Economic Behaviour and Organization		131
6	Money laundering, global financial instability, and tax havens in the Pacific Islands		2003	Contemporary Pacific		66
7	The looting continues: Tax havens and corruption		2011	Critical Perspectives on International Business		64
8	Cash and the Economy: Evidence from India’s Demonetization		2020	Quarterly Journal of Economics		60
9	Business Power and Tax Reform: Taxing Income and Profits in Chile and Argentina		2010	Latin American Politics and Society		56
10	Taxes, theft, and firm performance		2013	Journal of Finance		55
No.	Book/Book Chapter	Year	Cited	No.	Book/Book Chapter	Year	Cited
1	Tax havens: How globalization really works	2013	293	6	Tax havens: International tax avoidance and evasion	2013	11
2	Criminal capital: How the finance industry facilitates crime	2015	40	7	International tax evasion in the global information age	2016	10
3	Analysis of Classifier Algorithms to Detect Anti-Money Laundering	2021	27	8	Money Laundering and Tax Evasion—The Assisting of the Banking Sector	2017	10
4	On the extent, growth, and efficiency consequences of state business tax planning	2007	19	9	Tax justice and the political economy of global capitalism, 1945 to the present	2013	10
5	Offshore finance	2006	13	10	Legitimizing and delegitimizing factors of firms in society: Is it a problem of communication or strategic? An approach based on the distributed social value as the key factor for the organizations’ social legitimacy	2018	6

below provides a summary of the 10 most-cited journals relevant to the search terms (conventional banking and tax evasion). The findings derived from the research conducted by Alstadsæter et al. (2019) (article No. 2) and Johannesen (2014) (article No. 4) exemplify the wealth of academic insights and underscore the importance of both internal and external information exchange within the banking industry. The importance of information exchange is also discussed in the books Offshore Finance and International Tax Evasion in the Global Information Age written by Hilton McCann and Kerzner & Chodikoff, respectively.

Table 4. Top-cited articles and books in conventional banking and tax evasion. Source: derived by authors.

Top 10 Output and Citation Journals
Articles Output		Citation
Sources	Output	Sources	Citation
Journal of Money Laundering Control	14	Journal of Financial Economics	280
Journal of Financial Crime	8	Journal of Accounting Research	195
Journal of Public Economics	8	American Economic Review	158
International Tax and Public Finance	5	American Economic Journal: Economic Policy	150
Review of International Political Economy	4	Journal of Public Economics	147
EC Tax Review	3	Journal of Economic Behavior and Organization	133
Journal of Accounting Research	3	Quarterly Journal of Economics	114
Journal of Corporate Finance	3	Journal of Money Laundering Control	98
Public Finance Review	3	International Tax and Public Finance	72
Quarterly Journal of Economics	3	Review of International Political Economy	70

lists the top ten journals based on both the quantity of publications and citations within their respective domains. It appears that numerous outputs are dealing with topics related to financial regulation, financial crime or financial law, such as the Journal of Money Laundering Control and the Journal of Financial Crime. Meanwhile, the most frequently cited articles are those dealing with topics more from the area of economics, finance, and accounting. This suggests that published articles on tax evasion and banking reflect predominantly on the current status and the latest developments of tax evasion in the area of banking, and they emphasize a regulatory thematic concentration. On the other hand, the most influential papers in this field extend beyond the narrow scope of financial regulation and crime, encompassing broader themes, such as tax evasion and inequality (Alstadsæter et al. 2019), the interaction of tax evasion with the underground economy and financial development (Blackburn et al. 2012), the relationship between tax evasion and bank deposits (Johannesen 2014), the cost of bank loans (Hasan et al. 2014), or bank credit (Artavanis et al. 2016).

2.3.2. Co-Citation Analysis

Co-citation analysis involves investigating the referencing of a single article in other articles. In this section, we focus on observing the network of research themes in relation to tax evasion and conventional banking to form the clusters (Pizzi et al. 2020; Mustafa et al. 2022).

In the context of the cited-reference analysis within our dataset of 334 articles (Figure 11), a minimum threshold of five citations is applied. This criterion yields a subset of 34 cited references. For cited-author investigation, we establish a minimum citation threshold of 20 citations per author. This criterion is met by 79 authors in our dataset.

We assess the strength of bibliographical coupling by noting the higher density as demonstrated in Figure 12. In addition to the cluster derived by following Hanlon and Heitzman (2010), Armstrong et al. (2015), Graham and Tucker (2006) in tax research, covers topics, such as the review of tax research in accounting, tax avoidance/shelter, and their interaction with corporate governance, there is a notable cluster of studies authored by prominent researchers, such as Alstadsæter, Johannesen, and Zucman, which is worth mentioning. This specific body of research primarily focuses on tax evasion with a central emphasis on bank secrecy, exchange of information, inequality, and changes within the banking industry, especially in relation to deposit behaviors and offshore banking activities.

2.3.3. Research Trends Analysis

To examine the evolution of topics within studies on conventional banking and open banking, we conducted a visualization of research trend development. This involves selecting the top three authors’ keywords for each year, with a minimum frequency of three, and processing the data using the Biblioshiny software as per the methodology outlined by Yan et al. (2024). The resulting bar charts in Figure 13 and Figure 14 illustrate the research trends within these two fields. The midpoint on each line signifies the average term frequency, while the size of the dot indicates the extent of attention given to that particular topic.

Excluding general terms, such as “tax evasion”, “tax avoidance”, or “tax havens”, it is evident that discussions on the cluster of data sharing were prominently focused on issues related to “bank secrecy”, “privacy”, and “FATCA”, or “cash” (representing non-cash payment development) particularly during the period from 2008 to 2018. This timeframe coincides with the implementation of global data-sharing initiative, such as the FATCA and the AEoI, as mentioned earlier in this article. Notably, the topic of ‘exchange of information’ emerged more recently, particularly in 2020–2021, thus aligning with the widespread adoption of open banking practices worldwide. Another noteworthy observation is the evolving emphasis on topics, such as “tax transparency”, “tax aggressiveness”, “tax avoidance”, and “CBDC” (proxy for fintech, digital finance), which have been attracting more and more attention in recent years.

As emerging fields of study, the most trending topics in open banking have only gained prominence in the period from 2020 to the present day. The key discussions are focused on “data sharing”, “data protection”, and “fintech” and “blockchain”. This reflects the importance of foundational concepts related to data and the interest of academics for the exploration of new business models along with efforts to mitigate data risks through the development of fintech or blockchain systems.

3. Discussion

From the critical analysis in the SLR and bibliometric analysis, we have identified a number of opportunities and challenges associated with the research topic examined in this paper. Considering the literature on tax evasion and tax avoidance in conventional banking allowed us to have a broader understanding about the economic impact of them. However, we think because of the underlying technology in open banking, tax avoidance will be difficult to practice. On the other hand, there are no data to analyze the possibility of tax evasion. But the SLR and bibliometric findings give us hints about the possibility of tax evasion and how we can use the technology used on open banking as a tool to mitigate the problem. In the following section, we discuss the opportunities and challenges associated with open banking in addressing concerns currently present in conventional banking regarding the fight against tax evasion. To the best of our knowledge and practical experience, the findings are robust. Through these findings, we also make an attempt to map the future direction of research on open banking and tax evasion to extend the literature.

3.1. Opportunities

Following the analysis of both conventional banking and open banking in the previous sections of clusters’ analysis, we identify several key issues within the context of traditional banking, which can be addressed by the function of open banking. Despite numerous initiatives introduced using an automatic exchange of information (AEI) and exchange of information amongst state authorities around the world, new disguises for tax evasion keep emerging, and this presents a constant threat (Menkhoff and Miethe 2019; Ahrens et al. 2022; Langenmayr and Zyska 2023). Open banking, on the other hand, provides us with countermeasures based on enhanced transparency and data sharing. Real-time access to transaction data can help identify unusual patterns or large transfers that may indicate tax evasion. In addition, open banking facilitates greater transparency by allowing financial institutions and regulators to access comprehensive financial data across multiple platforms. This can help identify suspicious activities and discrepancies in reported income and transactions.

It is recommended that future research focuses on three key aspects delineating the advantages of open banking in addressing tax evasion: Enhanced Data Access, Improved Tax Monitoring and Compliance, and Automated Reporting.

Challenges persist in the form of data/information sharing or bank secrecy within the banking industry, impeding efforts to combat tax evasion. The foundational concept of open banking, however, presents a paradigm wherein tax authorities and other financial players gain access to financial data in a more comprehensive and real-time manner. This provides tax authorities, non-bank financial institutions, and fintech companies with the capability to develop a broader range of products and services using this source of raw data (Buckley et al. 2020; Zetzsche et al. 2020). It could include advanced monitoring services for cross-referencing tax filings with reported financial information, managing individual or business comprehensive history of financial data (Borgogno and Colangelo 2020). Thus, the likelihood of underreporting or non-reporting of income is significantly reduced. Advanced algorithms can also be used to analyze large datasets for patterns indicative of tax evasion, making detection more efficient and effective (Alm 2021; Yalamati 2023). This, in turn, supports that the end of bank secrecy is fast approaching, as banks are compelled to share their clients’ data, and it exacerbates the challenge for individuals and businesses to underreport income, evade taxes, or even engage in financial crimes.

Within the evolving landscape of payment and transaction innovations, open banking emerges as a facilitator of automated reporting and enhanced tax monitoring and compliance. Many findings in traditional banking discussed in previous sections also support the innovation of payments, especially non-cash ones, as a robust measure to counter tax evasion (Snellman et al. 2001; Zabyelina 2015; Chodorow-Reich et al. 2020; Monye 2023; Rainone 2023). APIs under open banking serve as a platform to enhance payment markets and encourage this sector’s evolution (He et al. 2023). Furthermore, this framework also aids tax authorities in monitoring financial activities, allowing for the detection of suspicious or unreported income. Leveraging data analytics and pattern recognition becomes imperative to identify anomalies indicative of potential tax evasion scenarios.

3.2. Challenges

Nevertheless, open banking presents several unprecedented challenges in combating tax evasion. Based on our analysis of existing literature in preceding sections, key issues appear to revolve around data security and privacy, infant regulatory frameworks, and the absence of international cooperation and global coverage in the realm of open banking.

The major concern pertains to the management of data security and privacy within the framework of open banking. Given the delegation of data access rights to third-party entities, the potential risk of taxation data leakage becomes an anticipated challenge associated with the open banking paradigm. The literature on conventional banking, tax evasion, and tax avoidance has previously elucidated the intricacies of information risk (Johannesen and Stolper 2017; O’Donovan et al. 2019). While reviewing the literature on open banking, a major concern emerged regarding the management of data sharing and privacy. A series of initial recommendations have been made to address these concerns from both a legal and technological perspective (Wang et al. 2020; Fracassi and Magnuson 2021; Ferretti and Petkoff 2022; Liao et al. 2022; Dinçkol et al. 2023), but we are still far from talking about comprehensive solutions. Robust cybersecurity measures are necessary to protect against data breaches and the misuse of personal information. The example of existing data protection laws, such as the General Data Protection Regulation (GDPR) (Regulation (EU) 2016) in Europe, can be followed in devising ways to balance the need for transparency with data protection and privacy. As always, achieving cooperation and coordination, at both the national and European level, among various financial institutions, regulatory bodies, and governments, is essential for effective implementation, and efforts should be concentrated toward this goal as well.

During the initial phase, when TPP, such as fintech companies, operate without stringent regulatory frameworks, the concern regarding data privacy management, as well as debates on appropriate data treatment, becomes more pronounced (Buckley et al. 2020; Zetzsche et al. 2020). The need for a well-defined legislative framework is evident, as illustrated by our bibliographic data in Figure 9, which highlights a significant body of literature in open banking focusing on the need for regulatory and legislatives initiatives. Consequently, we propose that future research looks into the extent to which carefully designed regulatory frameworks can be put forward to safeguard the security and privacy of financial data within the realm of open banking. This proposition is substantiated by a comprehensive discussion within Cluster B, which addresses jurisdictions related to tax evasions. It reveals the challenges posed by differences in international tax systems, serving as a barrier to effectively address this issue.

We also recognize that the absence of international cooperation and the lack of standardized global coverage of open banking could act as a barrier to fully leverage the potential of this initiative. Currently, only the EU, UK, and Australia have undergone a prolonged process in implementing open banking, while many other countries are still in the early stages of discussions or analysis (Zetzsche et al. 2020). The approaches to open banking among leading countries also differ. For instance, the UK market tends to adopt a customer-centric focus within its approach, emphasizing a regulatory framework that fosters increased competition (Dinçkol et al. 2023). Regarding the Australian case, in contrast to the EU’s Payment Service Directive 2 (PSD2) framework, Australia’s open banking implementation encompasses a broader range of financial products and involves a wider array of market participants than the UK (Australia’s coverage includes non-financial institutions) (Fracassi and Magnuson 2021). The divergence in open banking adoption, coupled with the previously discussed differences in tax jurisdictions, presents a real challenge in preventing cross-border tax evasion (Sharman 2012).

At this point, reference should be made to the resistance that is often observed from financial institutions. Traditional banks have shown some resistance toward open banking initiatives due to concerns about competition and the potential loss of control over customer data. For example, the PSD2 requires banks not only to open their APIs to TPPs but also provide all relevant information regarding the payment transaction in the same way as payment orders transmitted directly by the payer (PSD2, Article 66(2),(4); RTS 2018, Article 36(1)(B). However, several large banks in the UK have been rather slow to comply with the PSD2 requirements by mainly citing security and privacy concerns as additional barriers to full implementation (McKinsey & Company 2021). This is where regulatory authorities may need to intervene, offering additional resource and clarification for the application of the law, so that the open banking ecosystem is effectively managed and overseen.

In the course of our investigation across various research contexts in both conventional banking and open banking, a noteworthy distinction—that is, tax avoidance—has emerged due to the disparate legal conceptualizations of these two domains. This discrepancy becomes particularly discernible in the discussion surrounding the nexus between tax avoidance and corporate financial behavior.

Numerous studies have explored relationships between tax avoidance and the corporate costs of debts, banking contracts, or income shifting within the framework of traditional banking (Hasan et al. 2014; Beladi et al. 2018; Isin 2018; Joshi et al. 2020). However, as being similarly observed with tax evasion, the implications of open banking on tax avoidance remain unclear from this perspective. The initial findings from studies on open banking, which examine the rising competition in the lending market (Fang and Zhu 2023; He et al. 2023), suggest noteworthy alterations in the correlation between tax avoidance and corporate finance.

Consequently, comprehensive investigations are encouraged to uncover robust evidence within this thematic cluster. Further research should aim to contribute substantive insights and clarification to the dynamics between open banking and tax avoidance in the context of corporate finance.

3.3. Policy Implications

As it has been explained earlier, banking has traditionally been a consolidated sector with few actors, large barriers to entry, and with very high customer retention rates. Competition within banking has been scarce, and there were always concerns that end-users may not receive the most competitively priced products and services as a result. With the modern view of users as owners of their own data and the advent of legislation, such as the EU’s GDPR, has come the recognition that users could share their banking data with a trusted third party who, through API, lets insurers, mortgage providers, and other financial services providers bid for every individual customer. In this way, financial service providers would have to compete for customers more aggressively by offering better services, and more people would have access to financial services through frictionless applications. Recognizing that banks themselves have limited incentives to share their customers’ data, open banking has been primarily put forward and supported by regulators of fintech companies (Omarini 2018; Larsson and Frändberg 2019).

One such interesting example is the HM Revenue & Customs (HMRC) in the UK, which has also been active in exploring how open banking can aid taxpayers. In 2020, HMRC ran a procurement to find a suitable fintech that could supply account-to-account payments software. The winner was EcoSpend, who was awarded a £3 million contract. Through their proprietary technology, HMRC can now bring open banking “to online payments across 13 tax regimes, including self-assessment, PAYE, corporation tax, capital gains tax and stamp duty land tax” (EcoSpend 2023). By the end of September 2021, HMRC collected £1 bn in taxes through open banking (Open Banking 2021).

Despite being hailed as revolutionary, we have observed that the literature so far has highlighted the challenges and the problems associated with open banking. It is indeed necessary to discuss the practical aspects of this new tool and its implications for competition and access to the market. Nevertheless, reference should be made to its implications for policymakers. The implications for both taxation and tax evasion are at present limited, but there is a lot of potential, and this is an area that future research should focus on.

Having said this, it is estimated that the UK loses approximately £35 billion each year as a result of non-payment, avoidance, and fraud (Partington 2021). It has been argued that real-time automated tax payments through open banking ‘would signify the end of the tax season’, because there will be no more waiting until the end of the tax year to file taxes because people would be able to do it all through open banking APIs and would have paid them automatically with other bills, such as rent or utilities (Koeppl and Kronick 2020; Hamilton 2021; Gorshkova et al. 2022). However, we have to be realistic and acknowledge that we are still far away from that reality. The most likely immediate effect of open banking with regard to tax collection would be to see an increase in the collections as a consequence of those who accidentally underreport their income. If automated taxation becomes mandatory, then the possibility of evading taxes would be severely limited in any case.

Data sharing, aggregation, and analytics provided by fintech companies may, however, help enable accurate automated taxation (Azam et al. 2020). By providing real-time access to financial data, tax authorities can better track income, expenses, and financial activities, reducing the likelihood of tax evasion. It can help governments collect taxes more accurately and ensure a fair distribution of the tax burden, ultimately leading to increased revenue. It will be a unique occasion where there will be a collaboration between public and private sectors. Governments will need to work closely with financial institutions, fintech companies, and technology experts to develop and implement effective solutions for combating tax evasion. This collaboration will lead to the implementation of advanced algorithms and machine learning models to continuously assess financial activities, automatically flagging suspicious transactions for further investigation and ensuring compliance with tax regulations. At the same time, robust technological infrastructures will be required, which means that governments and financial institutions will invest in secure systems that can handle the large volumes of data exchanged while safeguarding against cyber threats.

A noteworthy example is again the HMRC, the public tax authority in the UK, which has started a process of investigating how it can use small businesses’ and self-employed individuals’ real-time financial transaction data, obtained with their permission through open banking, to calculate and collect tax (HMRC 2020). This process peaked with HMRC becoming the first tax authority in the world to launch a fully integrated open banking payments approach (HMRC 2022). Specifically, in March 2021, HMRC, in collaboration with Capgemini, introduced an open banking enabled ‘pay by bank account’ option (button) for people making online self-assessment tax returns (Hall 2022). This is far from a mandatory implementation of automated taxation, but it certainly represents a first attempt toward automated taxation through the adoption of open banking. It also reflects an attempt to combat potentially aggressive tax planning through greater transparency. Notably, ‘it is estimated that half of the UK’s small businesses and over four million individuals are now using services powered by open banking technology, figures that are set to rise as awareness increases’ (Capgemini 2022).

Gradually, policymakers and tax authorities should start developing a better understanding of the implications of open banking on revenue collection, and then evaluate their tax legislation with view of introducing new and innovative frameworks to address the emerging challenges. For example, tax authorities can leverage open banking data to offer personalized tax services, such as pre-filled tax returns or simplified reporting processes (Arner et al. 2017). By showcasing the advantages of open banking in tax management, its popularity among individuals and businesses can increase. This is why it is extremely positive that one prestigious authority of a developed country, i.e., the HMRC in the UK, has been actively endorsing the use of open banking, setting an example for other authorities and other countries. After all, open banking relies on the trust of individuals and businesses to share their financial information securely. By addressing tax concerns, such as data privacy, security, and how tax-related information will be handled, there will be more confidence in the system and less skepticism (Afield 2020). Companies and individuals will be more likely to adopt open banking if they feel assured that their tax-related information is protected and used appropriately (Grasi et al. 2021).

4. Conclusions

In a recent Open Banking Impact report (Open Banking 2023) based on seven million businesses and consumers, it was found that most of the businesses are already using an open banking system for their operation, and they do this in order to maintain a good relationship with their clients. Such a large intake of open banking systems by businesses actually helps them to reach out to their clients at a very fast rate and allows them to provide the products and services on time, while the satisfaction level of their customers is increasing. Timely and transparent transactions are also beneficial for the economy as a whole, because profits can be reinvested in other projects of high economic value. In other words, the higher the adoption of open banking systems, the higher the profits of the banking sector will be, and this can easily translate to a steady economic development of any country around the world.

Our aim is to reflect on the challenges that various authorities are facing nowadays in combatting tax evasion. The novel contribution of this paper is to check whether similar concerns exist in the framework of open banking and to explore suitable mechanisms to address them. In addition, we aim to identify tools, mainly technological ones, which could reinforce the arsenal of the authorities in tackling the negative effect of tax evasion. Our findings substantiate the proposition that the concept of data sharing and the digital finance-related developments facilitated by open banking represent pivotal measures to mitigate tax evasion. Simultaneously, the advancement of products in payment services could facilitate the close monitoring of tax evasion behaviors or invisible digital transactions, which can cause tax erosion (Mpofu 2022). Thus, we can identify challenges inherent in open banking, which highlight the existence of data privacy risks, an incipient regulatory framework, and disparities in its implementation.

Firstly, we find that open banking facilitates the sharing of financial data between banks and third-party providers through APIs, enhancing transparency. Indeed, increased transparency makes it more challenging for individuals to hide taxable income, as evidenced by Johannesen and Zucman (2014), who demonstrated that transparency reduces tax evasion opportunities. Against this backdrop, it is evident that increased reluctance in data sharing at the domestic level due to traditional approaches such as back secrecy and consumer data protection might prove it challenging to establish an international sharing regime.

Secondly, while bank customers have control over their data and can decide the extent of information to share, this can lead to gaps in the data available for tax enforcement. This selective sharing may result in under-reporting of income or transactions, as highlighted by Emmenegger (2017) in the context of Swiss banking secrecy.

Thirdly, open banking allows direct transactions with third parties, bypassing traditional banking channels and potentially evading tax authorities. Direct transactions can obscure financial trails, making it harder to track taxable events. The study by Blackburn et al. (2012) on financial development and tax evasion underscores the challenges of tracing financial flows.

Fourthly, existing regulatory frameworks may not fully address the complexities introduced by open banking, leading to potential loopholes. The regulatory challenges in harmonizing international standards have been discussed by Lee and Shin (2018), emphasizing the need for updated regulations to cover new banking practices.

Lastly, from a practical perspective, HMRC’s implementation of open banking underscores the importance of regulatory support and oversight in fostering the growth of open banking ecosystems. Regulatory frameworks that prioritize consumer protection, data privacy, and cybersecurity are essential for building trust and confidence in open banking platforms. By establishing clear guidelines and standards for data sharing and usage, regulators can create an environment conducive to innovation while safeguarding the interests of all stakeholders. Future research should aim at strengthening the role of data sharing and financial development introduced by open banking in reducing tax evasion and tackling money laundering. Open banking has the potential to drive innovation, improve service delivery, and enhance financial transparency and accountability. HMRC sets a precedent for other countries, and the greater the number of entities that recognize the benefits of open banking, the more the ecosystem surrounding open banking is likely to expand, leading to its broader acceptance and adoption.

In summary, the findings of this paper can be useful for a wide range of stakeholders. Academically, they push the boundaries of research by offering new perspectives on the intersection of open banking and tax evasion. It also paves the way for further exploration into banking innovations and their impact on tax issues. For practitioners, our study pro-vides actionable insights into how open banking can enhance the convenience of tax services while also introducing potential information security risks. It helps clients assess whether open banking solutions effectively meet their needs. Additionally, service providers can leverage these findings to pinpoint areas for enhancing their offerings and building greater trust with clients through improved delivery of the service. Finally, our study offers essential guidance for policymakers, such as those at HMRC, in developing a regulatory framework that keeps pace with the rapid evolution of open banking. By incorporating these insights, policymakers can better align regulations with technological advancements, ensuring a robust and adaptive financial ecosystem.