How Open Banking Works?

What is Open Banking?

Open banking is the practice of sharing financial information electronically, securely, and only under conditions that customers approve of. Application programming interfaces (APIs) allow third-parties to access financial information efficiently, which promotes the development of new apps and services. Ideally, open banking should result in a better experience for consumers.

What are the direct impacts from Open Banking?

Open banking efforts are a big deal for banks, regulators, and startups. But what about consumers? You should eventually have more options for managing your money, borrowing, and making payments.

Pressure on banks: While open banking allows third-parties to access bank information, banks themselves might decide to improve the services they offer. Instead of letting somebody else control the messages you receive, banks can compete with improved PFM tools and transparent, competitive pricing.

More helpful tools: Expect to see more third-party PFM tools. App developers will have an easier job with open APIs, allowing them to help you take control of your spending. With artificial intelligence, they may be able to predict events in your account or suggest products that may save you money. Of course, some apps might not recommend the best products and services—they’ll recommend the ones that pay referral or affiliate fees—so choose your tools wisely.

Streamlined lending: Getting a loan may become easier. Instead of manually gathering information from a variety of sources and submitting it to a potential lender, lenders can just grab what they need directly. Lenders may eventually have up-to-the-minute access to your checking and savings accounts, as well as the ability to download transactions for “alternative” lending decisions.

Data sharing: Open banking relies on sharing data, but you might prefer to keep your information private. Fortunately, open banking should not automatically reduce security or privacy. Third-parties, banks, and APIs would all use robust security measures to encrypt and protect confidential information.

Privacy and Regulations: Easier access to data has become a hot topic to analyze to gain insights in all industries, none more so than financial services. For instance, the G20’s Anti-Corruption Working Group has identified open data as a priority to advance public sector transparency and integrity. From a commercial standpoint, data can serve as a catalyst for new products and business models. The European Union has been proactive on this front, setting the rules of engagement through the updated version of the Payment Services Directive (PSD2).

How the world is reacting to Open Banking now?

While open banking stands to benefit end users as well as to foster innovations and new areas of competition between banks and nonbanks, it is also likely to usher in an entirely new financial services ecosystem, in which banks’ roles may shift markedly. 

It also raises issues around regulation and data privacy, which helps to explain why global markets have taken varying approaches to governance, contributing to disparate levels of progress. 

Regardless of region, the momentum toward open banking models seems clear, requiring banks and fintechs alike to position themselves for success in a new environment and to anticipate the likely customer impacts.