What is open banking? Everything you need to know

Open banking facilitating transactions

Open banking is changing not only the traditional characteristics of banking but also the broader financial sector. It is a development that inspires innovation within business and customer data ownership, and many believe it may revolutionize the financial ecosystem. The concept, however, is not widely known, and there are many misconceptions.

So, what is open banking?

Here is everything you need to know:

  • Open banking is the sharing of financial data between banks and regulated third-party providers (TPPs) with the account holder’s express permission. It will enable TPPs to make payments and access customer data through Application Programming Interfaces (APIs).
  • APIs play a critical role by connecting external third parties, such as fintechs, to banks’ databases. It is software that facilitates communication between different platforms, like a bridge between two points, providing a safe and secure venue for sharing financial data. Banks and TPPs may choose to work with an existing API, or they can create their own.

Is open banking safe?

The prospect of managing sensitive financial data and consenting to data-sharing with unknown third-party providers may make many people nervous. However, not only is open banking safe, it also increases data security:

  • Encryption: encryption encodes information and ensures that only the data owner or intended recipient can access the data.
  • Tried and tested systems: while the interface may be new, the software has been used by banks for years, with built-in security and counter-fraud controls.
  • Increased controls: the individual consumer decides with whom to share data, precisely what data and for how long. It is just as easy to withdraw consent as to give consent.
  • Minimized data handling: open banking will reduce the need to present sensitive financial and identity data to pay bills and open accounts. Consumers share the minimum information required for each transaction through a secure digital process and can authenticate the data using a verification model of choice, such as biometrics.
  • Regulated: the rollout of open banking is prompted by regulation that tightly controls security standards and data protection.

In fact, many consumers may not be aware that they are using the technology that enables open banking. Online transactions use an API at some stage of the process.

What are the benefits of open banking for consumers?

Open banking should provide consumers with immediate savings in time and cost. The access to data and the ability to aggregate, view and control financial information on one platform will produce a streamlined, more convenient banking experience, increase transparency, and assist the customer in making more informed financial decisions.

  • Enhanced, simplified financial management: all financial information is accessed on one platform, increasing visibility of finances and empowering decision-making
  • Greater choice: open banking encourages third party service providers and fintechs to enter the financial space, making it easier for consumers to engage with a wide range of financial services.
  • Faster onboarding: to open a new account, consumers share access to existing, bank account and transaction details instead of presenting forms, signatures, or utility bills to prove identity.
  • Easier, more secure payments and transactions: service providers will compete over customer experience, creating intuitive API interfaces, reducing friction wherever possible, making payments and transactions easier, more pleasant, and more secure than other payment methods.
  • Faster access to financing and credit: access to data and automated tools substantially empowers financing and credit decisions. There’s no need for cumbersome documentation as consumers give access to the necessary data and potentially get a response in real-time.
  • Benefits of open banking for fintechs and businesses

How does open banking help fintechs and businesses?

For the adventurous, energetic entrepreneur, the possibilities are many. Fintechs and other businesses can use their access to detailed data analysis to:

  • Increase their understanding of the market and consumer preferences
  • Develop new income streams
  • Enhance their current offerings
  • Connect with related organisations to create symbiotic relationships
  • Deepen their relationships with customers

What opportunities does open banking present for banks?

Open banking creates profound change in the financial services sector, fragmenting the market and making it easier for new entrants. In this environment, banks have a natural advantage. Traditionally, customers have been reluctant to move banks and hesitant to engage with unfamiliar organizations when it is a question of finances. A US study from 2018, for example, shows that only four per cent of US consumers switched primary banks that year. Consumers may shop around and open accounts with other banks, but they tend to keep their accounts and relationships with their primary bank.

Banks, therefore, benefit from brand recognition and market experience, resources they can leverage. But like their competitors, banks will be able to benefit from access to data. They can use this granular open banking data to strategize a way to future success by:

  • Focussing on more profitable services
  • Delivering a streamlined, tailored, and enhanced customer service
  • Providing customers with an easy-to-understand 360-degree financial view
  • Collaborating with market innovators to deliver new products and services

To do this, they need to invest time and resources to understand the various elements of the customer journey, assess their strengths and weaknesses in this context, and understand the necessary infrastructure and technology required.

Open banking regulations spread around the world

Several countries, such as the United Kingdom, Hong Kong and Australia, have introduced open banking regulations. Others are preparing to introduce regulations, including India, Japan, Singapore and South Korea.

In the Middle East and North Africa, Bahrain launched an open banking framework in 2020, the first country in MENA to do so. The United Arab Emirates introduced licences to authorize third-party operators to become account information service providers (AISPs) and payment initiation service providers (PISPs). The Kingdom of Saudi Arabia recently implemented an open banking policy as part of its Vision 2030 plan.

Other countries expected to introduce open banking regulation soon include Egypt, Jordan and Morocco.

While there are regulatory differences between countries, one common point is that banks must open their financial data to third-party service providers through an API.

Open banking powering the future

Open banking provides banks, fintechs, financial service providers, and third-party operators access, with customer consent, to a wealth of data that’s never been available on such a scale. Applying sophisticated and automated analytical tools to that data delivers profound, rich insights that are likely to spark innovation and development. Organizations will have the knowledge to design new services, tailor services to profitable niche markets, and enhance existing services.

The ability to share verified data should also reduce redundant processes, such as duplicated identity authentication across platforms, that delay, price gouge and cause frustration.

With so many opportunities ahead, it is nearly impossible to predict how open banking will develop. Consider the digitization of maps as an example. Initially intended to provide convenient guidance for travellers, digitized maps provided the infrastructure and connectivity on which several successful global businesses, such as ride-sharing, based their services. It won’t be long before enterprising innovators and business leaders see opportunities to leverage open banking technology in the same way. The possibilities are limitless.

We can only speculate at what open banking will bring.

Sign Up for Our Newsletter