What Is Open Banking?

Open banking is a standardized and regulated method through which banks securely share customer financial data with authorized third-party providers via APIs, with the explicit consent of the customer. 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, such as a payment aggregator that consolidates multiple financial flows.

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.

The United Kingdom mandates open banking through the CMA and PSD2 regulations, while the United States is developing a formal open banking framework under the CFPB’s rulemaking process. This is how banks and other financial institutions make data available for regulated providers to access, use, and share.

Open banking fosters innovation across the financial ecosystem:

• Financial service providers can develop personalized, data-driven products and enhance customer experiences.
• Businesses gain access to smarter, integrated financial tools that automate workflows and improve decision-making. For example, having an online merchant account makes it easier to integrate with financial tools powered by open banking.
• Consumers benefit from increased transparency, better control over their data, and access to more competitive financing and investment opportunities.

How Does Open Banking Work?

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.

Open Banking Explained with Examples

To better understand what open banking is, consider a budgeting app that connects directly to your bank account and categorizes your spending in real time. This is possible through secure APIs provided by your bank under open banking regulations. Another example is a lending platform that uses your transaction history — accessed with your consent — to offer instant, personalized loan options without paperwork. These real-world applications demonstrate how open banking makes financial services more transparent, efficient, and user-centric.

Benefits of Open Banking for Consumers and Businesses

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 can help users gain better control of their spending by offering smart tools powered by artificial intelligence. They may be able to predict events in your account or recommend products that will save you money by analyzing your financial habits.

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

Under PSD2 and evolving frameworks like PSD3, banks are required to allow licensed third-party providers to initiate payments on behalf of users. While many businesses accept credit card payments, open banking offers a direct, low-cost alternative. This shift supports real-time, low-cost alternatives to traditional card-based transactions, making payments faster, more secure, and less expensive to process.

Open Banking Risks and Concerns

Although open banking involves data sharing, it is governed by strict regulations and built on secure technical infrastructure. Banks are building secure infrastructure that enables data sharing with third parties — only when customers give informed and explicit consent.

While data security remains a top priority, customers should be aware of potential risks. Open banking frameworks include strong regulatory safeguards, but vigilance around consent and provider reputation is essential. 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.

The process involves secure API connections regulated by national and regional frameworks, where customers must give explicit and granular consent for each type of data shared. 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. Much like how the UTR number helps track transactions in traditional banking, open banking relies on transparent API protocols.