The fintech revolution takes no prisoners. New technologies are revolutionizing the way finance is conducted, creating more efficient and cheaper financial services across the board. This hasn’t been more true than in the banking industry, where a new type of banking is opening the doors to data collection, and in turn, better products and services for banking customers. That is, as long as it doesn’t create more of a security risk for consumers and businesses.
What is open banking?
Traditionally, banks closely held all transaction and account data for their customers for security reasons. However, financial institutions and technology companies have recognized the benefits of opening data collection and sharing between third parties for the benefit of banking customers. This allows for seamless and fast access to information, as well as the ability to anonymize data. This opening of banking data to third parties has come to be known as “open banking”.
Previous methods of data sharing by banks included methods like screen scraping, which required users to enter their bank username and password into every third-party service. These data sharing methods were not only unreliable, they served as a major security risk for consumers and businesses.
Alternatively, the main technology used in open banking is Application Programming Interfaces (APIs) which is the mechanism that gives outside parties access to banking data. Through the use of APIs, an entire ecosystem of banks and trusted third-party providers is better able to serve its customer base.
Why is it important?
The most important asset in today’s world is data, and banking data is the cream of the crop, as it provides insight into how consumers and businesses are spending money, saving, and acquiring debt.
The average consumer has multiple bank and credit accounts. In the past, to get a holistic picture of their finances, consumers had to manually compile their financial information from all of their accounts in one place. Open banking now allows third-party services to aggregate data from multiple financial institutions and let consumers analyze their spending and earnings, allowing them to better budget for the future.
Through the use of open banking financial services can offer better product recommendations for their customers, such as a more optimal credit card or savings account with a better interest rate. Banking services, such as applying and being approved for a loan, can now be done much more quickly, as financial firms are able to easily share information between one another. With open banking loan origination times have been significantly reduced, with financial institutions partnering together to provide faster loan originations.
All of this will add up to massive savings for banking customers. In England alone, it is expected that open banking could save consumers and businesses a collective £18 billion in value per year.
Open banking in Europe
Europe has created its own legal framework in which it can regulate and monitor open banking practices. In 2018 countries in the European Union began to adopt Payment Services Directive 2 (PSD2), a set of regulations designed to open up access to banking data.
The adoption of PSD2 meant that banks are required to give their customers access to their own data, allowing these customers to then provide this data to third party providers. With more banking data flowing in and out of banks, PSD2 also required stronger identity checks for banking customers to ensure better digital security.
By requiring banks to open data access, PSD2 hopes to make the financial industry more inclusive. “The directive aims to improve the level-playing field for payment service providers – including new players or FinTechs – and contribute to a more integrated and efficient European payments market,” says the EU. “Overall, the updated rules will help to facilitate innovation, competition and efficiency in the EU online payments market.”
An initiative known as Open Banking Europe (OBE) was started to help manage and facilitate open banking, taking it from concept to reality. OBE offers a variety of tools and resources for developers and financial institutions in the industry, such as a Bank API Directory which lists all available public APIs used by banks. The project boasts participation from financial firms such as Citi, Bank of America, Danske Bank, Deutsche Bank, and HSBC, among others.
Companies leading the charge
Some companies are taking charge of providing better open banking services as the access to data has made banking innovation easier than ever. On the technical side, services are being created for companies to integrate their own products into banking information and payments. The London-based Yapily works on the side of businesses and services, giving them the tools to integrate more than 250,000,000 bank accounts into their own products. TrueLayer is a similar company which recently partnered with Visa as part of its Series C funding round in which it raised $35 million.
The Open Bank Project (OBP) is a consortium of over 11,000 developers and fintech companies facilitating a better flow of financial data. This type of collaboration in the finance industry could be the new norm:
“OBP offers a fully-operational and self-contained sandbox environment deployed in the cloud or on-site and using test customer data. This sandbox environment enables the bank to offer an experimentation facility without connecting to production systems (ideal for hackathons and prototyping). It includes a catalogue of over 250 pre-built APIs to choose from – e.g. access to accounts, transactions, payments, KYC, etc.”
For consumers, finance apps to budget and control expenses are now the norm. Mint was one of the first companies to provide its users with all of their financial information in one app complete with budgeting and bill payment tracker. Today, there are many more options for consumers to track financial data, such as You Need A Budget which completes all of the budgeting work you previously did in an Excel spreadsheet automatically, giving you insight on how to better manage your own money. PocketGuard gives you real-time insight into your spending, helping you determine how much you can afford to spend in any given moment.
There are also new, innovative apps for investing which utilize banking data. Acorns lets you invest your spare change automatically, without doing any work yourself. Personal Capital will analyze your financial accounts to determine your current financial health and how you could better invest in the future.
Risks and regulation
Historically, the public has been hesitant to share their personal banking information. This is especially true given the bevy of attacks on financial and banking data that have only been increasing in recent years. This makes consumer education an important aspect of this new technology, where a recent study found that only 22% of residents in the UK have heard of open banking.
The idea of consumers and businesses opening the doors of their personal data runs counterintuitive to the messaging they have received in the past decade about securing all online data. Open banking will have to educate consumers about why allowing for a more open data structure in banking will benefit them. According to the Institute of International Finance:
“The narrative they have been rightly told to date — do not share your data, do not open yourself up to attack — is difficult to align with a market evolution based on opening data. In this new context, education must raise consumer awareness and understanding of what they are doing with their data, the functioning of consent mechanisms and the risks and benefits of the new products and services.”
The other main issue with open banking, as with any sharing of data, is privacy. As banks open their doors to financial service providers there is an increased risk of data being compromised or stolen. This is especially troubling seeing as banking data is extremely sensitive and personal information.
Yet, when compared to previous methods of data collection, such as screen scraping, open banking provides a significant boost in security and scalability. With open banking, passwords are not shared with third-party providers, and third-parties can be regulated by local authorities, making them known and keeping them in-check.
A system of open and shared data isn’t any good if no one decides to participate. Consumers must be able to see the direct benefit of open banking, or else they will fail to give their consent and participate fully in this new ecosystem. Therefore, it is up to financial institutions and fintech companies to show the value of this new technology.
The pressure is on
Ever since the 2008 global financial crisis, the public sentiment of traditional banks has been extremely negative. With the advent of open banking, alternative financial resources are now more efficient and cheaper than ever before, better serving consumers and businesses alike. The banking experience that used to be tedious and costly is beginning to shift, all thanks to open banking.
This has immediately put more pressure on traditional banks to step up to the plate and offer better services than ever before, reducing their fees, and creating a more compelling case for their customers who have more banking opportunities than ever before.
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