What Is Open Banking?

Open banking is a new method in which banks grant access to third-party financial service providers via an application programming interface (API) with the consent of their customers. These third-party providers (TPPs) gain access to your banking data and help you monitor it in a specific way, depending on their business model and service, or they facilitate transactions, such as making payments directly from your bank account.

You may have borrowed money from a bank to purchase a home, and you most likely make the majority of your monthly payments from your checking account. However, technology is increasingly enabling you to maximize the value you receive from your bank beyond those basic services. Third-party providers (TPPs) can help you save money, borrow more efficiently, and pay more easily with open banking.

There are already regulations in place in the United Kingdom that require banks to work with authorized third-party payment services, while in the United States, some banks voluntarily make data available. This is how banks and other financial institutions make data available for regulated providers to access, use, and share.

Open banking is a win-win for all parties:

• Open banking will enable financial service providers to upgrade their products and services.

• It will provide more effective and efficient financial tools for businesses.

• Customers will have access to more financing and investment options.

How Open Banking Works

Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs) are the two primary providers that function within the Open Banking system. AISPs can access and compile customer account information, and PISPs, on the other hand, initiate payments. AISPs develop open banking platforms and apps to enable businesses to access customers’ financial data to give them better services.

However, customers need to permit their banks to share their data through the open banking API for this system to function correctly. Financial services that offer open banking use this data from the banks. They have a wide range of tech tools to work with, such as accounting apps, budget apps, expense tracking apps, among others. The open banking option provides more financial opportunities for customers, banks, regulators, and third-party payment services.

Benefits of Open Banking

Banks Will Be Pressured to Improve Their Services

While open banking allows third-party payment services to gain access to financial data, banks may decide to improve the services they provide. It will bring healthy competition between banks and these third-party companies.

Additional Resources

With open APIs, app developers will find it much assisting you to gain control of your spending. They may be able to predict events in your account or recommend products that will save you money using artificial intelligence.

Streamlined Financing

Obtaining or refinancing a loan may become less complicated. There won’t be any need for customers to submit data to potential lenders. Also, consumers can allow lenders to have access to the information they need, so they get a better offer.

Loans for Businesses

Businesses will no longer have to submit reports to lenders because the bank can obtain this information. It cuts down the lengthy loan process, which was synonymous with traditional banking systems.

Accounting Automation

Accounting processes that are much easier and more affordable will benefit both businesses and consumers. Whenever a financial transaction is completed, integrated systems can automatically update, and you may save time on tax preparation.

New Payment Options

In an open banking system, banks are obligated to permit third-party payment services to initiate payments on customers’ behalf. The European Commission’s Second Payment Services Directive (PSD2) already provides this. It will help make payments easier to be processed and reduce payment processing charges.

Open Banking Risks and Concerns

Although banks give other financial institutions access to customers’ data, this process is not as dangerous as it sounds. Banks are effectively putting in place the infrastructure for their customers’ data to be shared more easily with third parties if the customer.

There is no reason to worry about a data breach, and open banking won’t be a tool for banks to make money by selling customers’ data. The purpose is to improve financial services alone. Open banking does not imply a loss of security or privacy. Third-party payment services and banks would have to take precautions to safeguard confidential information. They will also need to educate their customers about the potential risks they face.

Usually, the process financial institutions use to share your data. In the UK, customers need to approve information sharing with specific parties. Any sharing you authorize puts your information in the hands of someone else. Then there’s the question of how effective third-party payment services will be in protecting such data.