Open Banking, often referred to as “open bank data,” is revolutionizing the banking sector by allowing third-party financial service providers access to consumer financial data through application programming interfaces (APIs).
This practice facilitates the networking of accounts and data across various financial institutions, fostering innovation poised to reshape the industry’s landscape. While Open Banking presents opportunities for enhanced financial management and innovation, it also introduces potential risks concerning data privacy and financial security. Below, we delve into the intricacies of Open Banking, examining its promises and pitfalls.
Key Insights
- Open banking allows third-party financial service providers to access consumer financial data, enabling innovation and enhanced financial services through the use of secure application programming interfaces (APIs).
- Through open banking, consumers can benefit from more personalized financial services, such as finding better financial products, improving loan terms, and accessing features tailored to specific needs like budgeting or fraud detection.
- While open banking offers convenience and competition, it also poses privacy and security risks, including data breaches and misuse of financial data by third parties.
- The open banking system could drive established banks to innovate and improve customer service as they compete with agile, tech-savvy newcomers, ideally lowering costs for consumers.
How Open Banking Operates
Open banking lets banks permit third-party providers, often tech startups or online financial services, to access and control customers’ personal and financial data. Customers typically give consent, like checking a box on a terms-of-service screen, to allow banks to provide such access.
Third-party APIs can use the customer’s shared data and information about their financial counterparties. Uses might include comparing the customer’s accounts and transaction history to a range of financial service options, aggregating data across participating financial institutions and customers to create marketing profiles, or making new transactions and account changes on the customer’s behalf.
Benefits and Innovations of Open Banking
Open banking is a major source of innovation in the banking industry. 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 facilitate the sometimes onerous process of switching from using one bank’s checking account service to another bank’s.
Open banking, through networked accounts, could give lenders a clearer view of a consumer’s finances and risk, allowing for more advantageous loan terms. It could help consumers better understand their finances before taking on debt. An open banking app for customers who want to buy a home could automatically calculate what customers can afford based on all the information in their accounts, perhaps providing a more reliable picture than mortgage lending guidelines currently provide.
Open banking will push large banks to compete more with smaller banks, potentially lowering costs and improving technology and customer service. Established banks will have to do things in new ways that they are not currently set up to handle and spend money to adopt new technology.
Before banks offered open banking, the closest thing available were aggregation sites like Mint or Personal Capital that combine users’ account information from all their financial institutions so they can see it in one place. These services require users to provide usernames and passwords, then scrape data from account screens. 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.
Navigating the Risks of Open Banking
Open banking can provide convenient access to financial data for consumers and reduce costs for financial institutions. However, it also poses significant risks to financial privacy and consumer account security, potentially leading to liabilities for financial institutions. Open banking APIs are not without security risks, such as the potential for a malicious third-party app to clean out a customer’s account. This would be an extreme (and less likely) threat. Much broader concerns would simply be data breaches due to poor security, hacking, or insider threats that have become relatively widespread in the modern era, including at financial institutions, and will likely remain commonplace as more data becomes interconnected in more ways.
Open banking is likely to alter the competitive landscape of the financial services industry, which could benefit consumers by increasing competition as described above, but could also have the reverse effect and increase consumer costs if it leads to consolidation in financial services, due to the natural economies of scale from big data and network effects.
What Open Banking APIs Enable Merchants to Do
Open banking APIs present multiple benefits for merchants, which include:
Initiating payments:
As we covered above, with PIS APIs payments can be initiated directly from bank accounts, bypassing the need for the longer, arduous card payment process. These account-to-account payments settle instantly, in real time, providing a seamless and secure experience for customers and predictable revenue for merchants.
Seamless verification:
While Strong Customer Authentication (SCA) is an effective method of verification, it creates another layer of friction for customers. Open banking APIs enable quick and easy identity verification – customers are redirected to their banking app, where they use biometrics to complete the verification process in seconds.
Fraud prevention:
Not only does the verification process keep fraudsters at bay, but the overall payment taking place within the customer’s online banking environment, it instinctively benefits from bank-grade security. As the customer simply selects their bank and completes the payment, they don’t share any sensitive data at all – everything is encrypted and tokenised. It means hackers have very little data to target, reducing the risk of fraud.
Data-driven customer experiences:
With AIS APIs, businesses can – with the customer’s permission – access detailed financial and banking data from within the customer’s bank account, such as spending habits and statements. This information can inform strategic decision-making, risk assessment and investment planning. As a result, businesses can offer tailored, individualised services, enhancing the overall customer experience while increasing collaboration between legacy banks and newer technologies.
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Conclusion
Open banking is a financial services model that allows third-party financial services providers to access a customer’s data with consent through secure application programming interfaces. APIs are considered a more secure option because they enable applications to share data directly without sharing account credentials.
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