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.
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.
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 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.
Open Banking is based on existing security systems that banks provide and use. Users should not exercise worries about open banking because they are extremely safe. Banks are required to use rigorously tested software and security systems, and Open Banking also has the same level of security as any other banking interface you may use with your bank. Another thing you should know is that the Open Banking APIs, which are quite popular, control and limit the information that a third-party system receives.
Financial institutions are also mandated to enroll in the Open Banking Directory. They are also guided by local or international regulatory bodies, such as the European National Competent Authority and FCA. When there is a data breach or unauthorized transaction, the customer will be compensated.
Also, you have control over who has access to your banking information. It is crucial that you properly read the terms and conditions and know what precautions to take with open banking.
Possible Business Outcomes of Open Banking
New fintech startups can compete in many services that banks previously relied on in a seamless, low-cost, and efficient manner. Today, there are fewer reasons for customers to use their bank for anything other than the bare necessities. That scope could become even more limited in the future.
Payments are made quickly, easily, and directly. It will be easy to purchase goods or services from banks through eCommerce platforms. Third parties with access to bank data can compare the customer’s accounts and transaction history to various financial service options. Also, aggregating data from participating financial institutions and customers to create marketing profiles is one way they can use the data.
There will be an increase in the number of personalized products and services because of access to more data sources. Consumers will now have services that correspond to their consumption needs and a much friendlier, simpler, and faster experience. All of this is made possible with the availability of financial information.
Like all good financial technologies, open banking is designed to be highly secure. It is implemented by banks and is subject to their stringent security measures. There are many benefits this new banking system brings to the financial world. Businesses and individuals will have more flexible ways to bank.
Thanks to open banking, people can now access various services from a single location. They would also be able to enjoy the best offers available with greater transparency. Customers would be able to view their current financial situation in a single application on their smartphone, making for a more efficient banking experience.