Another trend in fintech for the year is Open Banking. Its prospects are widely used by fintech companies that provide services such as loans, spending tracking, financial planning, and budgeting. But then, what exactly is it?
What is Open Banking?
Open banking is the process in which banks and financial institutions give regulated providers open access to data to use and share. By allowing third party payment services and other financial service providers to access banking transactions and data, open banking enables secure connections in the banking sector. Application programming interfaces, or APIs, allow third-party organizations to access the data. The primary objective of open banking is controlled financial information exchange. Account holders have the option to approve rules for safely exchanging their financial data with unorthodox financial institutions. Thanks to open APIs, third-party vendors have access to their clients’ financial information1.
At first glance, this may sound unsafe but it really isn’t as dangerous as it may sound. Banks only share their customers data to third-parties when their customers give consent and choose to do so. As such, open banking is gaining popularity as the international economy develops because it enables quicker, more secure transactions anywhere in the globe and gives customers more chances to manage their accounts with the help of third parties.
What is its Role?
To begin with, open banking helps the consumers by giving them better options to spend, borrow, and invest. With that in mind, financial service providers will then innovate their product offers to businesses, big and small. Financial instruments in businesses, particularly payments, will be more effective and efficient thanks to the innovations produced by financial service providers. This will then result in increased automation and thus lessen cost for these businesses2.
Let’s move on to its pros and cons3.
The Benefits of Open Banking
The capacity to integrate data through the APIs from various accounts in order to communicate information between financial institutions, customers, and third-party payment service providers effectively is one advantage of open banking. This has been changing the banking industry’s competitive environment and customer experience gradually, in part because of disruptions from outside sources.
Access to networked accounts has advantages for both consumers and businesses. Lenders are able to assess the risk associated with the transaction and offer the most favorable account conditions since they have a complete understanding of their borrowers’ financial situation. It also enables the user to gain a better understanding of their personal financial situation prior to making any financial decisions.
The Risk of Open Banking
he possibility of customer data getting stolen is the biggest risk of open banking. Sharing the data between financial institutions and third-party businesses increases the likelihood of it ending up in the wrong hands. Malware that is created by third-party software developers with the intention of hacking accounts and erasing data is still a problem. Concerns about payment service companies abusing their own customers’ data to obtain a competitive edge in the market also exist.
Despite the risks, open banking and the entry of smaller, non-traditional institutions prepared to compete in the market are replacing traditional banking. Long-term success will go to those who make an effort to adapt to new technology as opposed to those who stick with the status quo.
How is it Reshaping the Future?
Financial organizations will have a much more accurate image of people thanks to open banking. People can control their image and decide what information to broadcast on social media, making it difficult to know what they are actually like. With this, banks now have access to data that reflects their customers’ actual, undisturbed lives. The potential will be enormous when you combine this with the strength of organizations like Google. Open banking is a response to the evolving consumer needs and the enabling technical developments.
Consumers had to settle for the goods and services that their bank provided in the past. Thanks to this customers can now choose from a greater selection of goods and services, including those provided by various banks and financial organizations. In the end, open banking enables banks and outside service providers to give their clients a more simplified and tailored experience. It would enable customers to take charge of their finances and assist them in making wiser financial decisions.