- Open banking, or “open bank data,” utilises APIs to grant third-party financial service providers access to customer banking and transaction data, revolutionising the financial sector.
- Open banking simplifies access to tailored services and promotes service centralisation, enhancing user experience and enabling informed decision-making.
- Concerns regarding safety and customer trust arise due to data sharing apprehensions and challenges for major financial institutions.
Open banking provides financial services by offering convenient ways to manage money, access credit, and enjoy personalised deals. It also supports diverse payment services like in-game purchases and business accounting apps.
While numerous individuals are already utilising open banking services, there is limited awareness about this trend or its underlying mechanics. So, what exactly is open banking?
What is open banking?
“As a concept, open banking tries to give more power to the customer, letting them decide who can access their financial information and – in some cases – act on their behalf.”
Jakub Piotrowski, vice president of product at Bud Financial
Open banking, also referred to as “open bank data”, is a banking technique that uses application programming interfaces (APIs) to give third-party financial service providers open access to customer banking, transactions, and other financial data from banks and non-bank financial organisations.
Open banking facilitates the networking of accounts and data across institutions, enabling customers, financial institutions, and external service providers to connect seamlessly. This evolving phenomenon is emerging as a powerful catalyst to revolutionise the financial sector.
Jakub Piotrowski, vice president of product at Bud Financial, an AI-powered data intelligence firm, highlights the foundation of open banking: “As a concept, open banking tries to give more power to the customer, letting them decide who can access their financial information and – in some cases – act on their behalf.”
Also read: How did the internet start?
How does open banking work?
Upon registration for open banking service, each provider will seek authorisation to access information. Following this, a request will be made to the user’s bank, which will handle it and provide the necessary information. Furthermore, consent can be revoked at any time.
Banks utilise APIs to securely communicate personal information. Through APIs, providers can effectively exchange data authorised for sharing, including bank balances and scheduled payments.
Pop quiz
How does open banking work?
A. By physically sharing customer documents with third-party providers
B. Through secure communication of personal data via APIs
C. By completely eliminating the need for customer consent
D. By storing all customer data on a single centralised server
The correct answer is at the bottom of the article.
What are the applications of open banking?
Open banking has enabled the creation of numerous beneficial “money management” websites and applications. These platforms utilise financial data to offer personalised services and suggest methods to save money tailored to individual spending patterns.
For instance, individuals often maintain accounts across various banks or brokerages. Open banking facilitates aggregating information from all these accounts into a single real-time dashboard, allowing users to view all finances in one consolidated location.
Moreover, open banking has the potential to optimise financial management. Certain financial service providers integrate artificial intelligence to provide actionable insights, aiding in budget creation and money management.
Open banking is also utilised in the market of online payments. Certain online retailers can now connect directly to the customer’s bank, eliminating the need to input card details.
Approval is facilitated through the individual’s online or mobile banking platform, with this capability extending beyond online shopping. It encompasses tax obligations, including self-assessment tax returns, capital gains, and stamp duty.
Advantages of open banking
“Open banking creates a foundation for solving this problem and lets the customer be in control and make more informed data-driven decisions – likely with the help of open banking-based services.”
Jakub Piotrowski, vice president of product at Bud Financial
Open banking, firstly, simplifies access to customised solutions and services tailored to individual needs. This is made possible by the plethora of APIs available and continuously being developed, thereby simplifying various tasks.
Open banking brings another significant advantage: service centralisation. It allows banks to resume full control over every aspect of their customer’s requirements, from advice and loans to transfers and financing. This centralised approach ensures operations are carried out more effectively and visibly under one administrative umbrella.
Jakub Piotrowski emphasises the user experience benefits of open banking. He explains: “For a vast majority of customers, their finances are distributed across many different providers, and it is difficult to get a full understanding of one’s situation. Open banking creates a foundation for solving this problem and lets the customer be in control and make more informed data-driven decisions – likely with the help of open banking-based services.”
Disadvantages of open banking
“Regulators are finalising rules to ensure consumers have the right to share their banking data with whichever service providers they choose.”
Kathy Stares, executive vice president of North America at Provenir
Open banking also raises concerns regarding safety issues and has the potential to diminish customer trust.
Customers have shown apathy or lack of trust towards this emerging banking model, partly fueled by apprehension about sharing their data and a lack of understanding of its functionality.
Furthermore, the expansion of open banking that has assumed roles traditionally held by banks presents a significant challenge for major financial institutions.
Kathy Stares, executive vice president of North America at Provenir, an AI-powered risk decisioning platform, views open banking as inherently beneficial, yet cautions against the potential misuse of personal data in the absence of proper oversight.
She advocates for regulatory intervention, stating, “Regulators are finalising rules to ensure consumers have the right to share their banking data with whichever service providers they choose.”
Also read: China: World’s first truly cashless society?
3 leading open banking providers
The United Kingdom, through initiatives like the Open Banking Implementation Entity and the Revised Payment Services Directive (PSD2), has established a comprehensive legal framework to regulate and promote open banking services. This legislation mandates banks to share customer data with authorised third-party providers, fostering competition and innovation in the financial sector.
1.GoCardless
GoCardless is dedicated to establishing the global bank pay network. Their platform provides two primary solutions: Verified Mandates for instant account verification and Instant Bank Pay for immediate payments. Currently operational in the UK and Germany, this service ensures merchants a seamless payment experience, including bank debit fallback for customers who don’t use online banking.
2. Plaid
Based in San Francisco, Plaid is an open banking platform known across Europe and the UK. Initially set to be acquired by Visa for $5.3 billion in 2020, the deal fell through, resulting in Plaid’s current valuation of $13.4 billion. Widely favored by major fintech firms, including Venmo and TransferWise, Plaid boasts a global presence and emphasises its “local expertise” and customisable solutions.
3. Tink
Tink, a Swedish-founded open banking provider, operates in both Europe and Latin America. With backing from PayPal, the platform has experienced rapid growth in continental Europe, particularly in the European Economic Area (EEA). Despite not reaching the scale of Bud or Plaid, Tink interfaces with over 2,500 financial institutions and manages over 10 billion transactions yearly.
The correct answer is b, through secure communication of personal data via APIs.
