What is Open Banking?
Open banking is also known as “open banking data”. Open banking is a banking practice that provides third-party financial service providers with open access to bank data, transactions, and other financial data from banks and non-bank financial institutions through the use of application programming interfaces ( API). Open banking will allow the networking of accounts and data between institutions for the use of consumers, financial institutions and third-party service providers. Open banking is becoming a major source of innovation, ready to reshape the banking sector.
Key points to remember
- Open banking is the system for accessing and controlling consumers’ bank and financial accounts via third-party applications.
- Open banking has the potential to reshape the competitive landscape and consumer experience in the banking sector.
- Open banking increases the potential for both promising gains and serious risks for consumers, as more of their data is shared more widely.
Understanding Open Banking
In open banking, banks allow access and control of customers’ personal and financial data to third-party service providers, which are typically tech startups and online financial service providers. Customers are normally required to provide some form of consent to allow the bank to authorize such access, for example by checking a box on a terms of service screen in an online application. Third-party APIs can then use customer shared data (and customer financial counterparty data). Uses can include comparing customer accounts and transaction history with a range of financial service options, aggregating data between financial institutions and participating customers to create marketing profiles, or performing new transactions and account changes in the name of the client.
The promise of Open Banking
Open banking is a driver of innovation in the banking sector. By relying on networks instead of centralization, open banking can help financial services customers to securely share their financial data with other financial institutions. For example, open banking APIs can ease the sometimes costly process of switching from using a current account service from one bank to another bank. The API can also consult consumers’ transaction data to identify the best financial products and services for them, such as a new savings account that would earn a higher interest rate than the current savings account or a different credit card with a lower interest rate.
Through the use of network accounts, open banking could help lenders get a more accurate picture of a consumer’s financial condition and risk level in order to provide more profitable loan terms. It could also help consumers get a more accurate picture of their own finances before going into debt. An open banking app for clients looking to buy a home could automatically calculate what clients can afford based on all of the information in their accounts, perhaps providing a more reliable picture than the mortgage guidelines currently provide. Another application could help visually impaired customers better understand their finances through voice commands. Open banking can also help small businesses save time with online accounting and help fraud detection companies better monitor customer accounts and identify problems earlier.
Open banking will force large, established banks to be more competitive with smaller, newer banks, ideally resulting in lower costs, better technology, and better customer service. Established banks will have to do things in a new way that they are not currently in place to manage and spend money to adopt new technologies. However, banks can take advantage of this new technology to strengthen customer relationships and build customer loyalty by helping customers manage their finances better, rather than just making transactions easier.
Before the banks offered open banking services, the closest sites were aggregation sites like Mint or Personal Capital which combined user account information from all of their financial institutions so they could see it in one only place. These services accomplish this by requiring users to provide their usernames and passwords for each account, and then removing the data from the screens of those accounts. This practice poses security risks and the results of screen scraping are not always completely accurate, which sometimes makes it difficult for users to identify transactions. In addition, users may find that not all of their financial accounts are compatible with account aggregation services, preventing them from getting a true or complete picture of their finances. APIs are considered a more secure option because they allow applications to share data directly without sharing account credentials.
The risks of Open Banking
Open banking can provide benefits in the form of convenient access to financial data and services for consumers and streamlining certain costs for financial institutions. However, it also poses serious risks to the financial privacy and financial security of consumers, as well as the resulting liabilities for financial institutions. Open banking APIs are not without security risks, such as the ability for a malicious third-party application to clean up a customer’s account. It would be an extreme (and less likely) threat. Much broader concerns would simply be data breaches due to poor security, hacking or internal threats which have become relatively widespread in the modern era, including in financial institutions, and will likely remain common as more data will be interconnected in several ways.
Open banking is likely to change the competitive landscape of the financial services industry, which could benefit consumers by increasing competition as described above, but could also have the opposite effect and increase consumer costs. it leads to a consolidation of financial services, due to the nature of economies of scale thanks to big data and network effects. The resulting market concentration and associated pricing power could more than offset the cost benefits to consumers. Such market consolidation has already been observed and widely criticized in other Internet-based services, such as online shopping, search engines and social media, as consumers and regulators believe that data of customers are misused by tech giants. for their own benefit. Beyond the direct costs of market concentration, similar misuse of clients’ private financial data could ultimately raise even greater concerns.