Open Banking: What it means for us

Banking and finance are becoming more ‘open’, more ‘digital’, and more ‘technological’ — in simple, jargon-free terms.

While this is true, in not-so-simple terms, open banking is the process of enabling third-party financial services providers to access consumer banking information such as transactions and payment history through the use of application programming interfaces (APIs).

Your financial data is already being securely shared through APIs, which allow two providers to communicate and exchange only the information you've authorized, like your bank balance and regular payments. This is the same technology used by popular apps such as Uber and Google Maps, where the API enables the app to determine your location accurately.

With the same use of APIs, open banking has the potential to disrupt how banks, businesses, and consumers share and use financial data. Armed with this information about open banking, it begs the question. Why should you care?

Open Banking rules in the UK have revolutionized financial data sharing since 2018. Now, authorized providers can access read-only data on your spending transactions and regular payments from the country's largest banks. Using this information, money management apps provide personalized services and savings recommendations based on your spending habits. It's a simple process - providers ask for your consent when you sign up and send a request to your bank to access the information. And if you change your mind, you have the power to withdraw your permission at any time.

Open banking is the process of enabling third-party financial services providers to access consumer banking information such as transactions and payment history through the use of application programming interfaces (APIs).

If anything, API technology is here to make information management more secure. Access to APIs is governed by banking industry standards such as?PSD2, which mandates technical authorization, user authentication, and consent.

What Open Banking Can Do

? Streamlined lending. With Open Banking, lenders can directly access all the necessary financial information, rather than having consumers manually gather and submit it. This results in better loan offers and more profitable terms for consumers.

? Automated Accounting. Businesses and consumers may also benefit from easier and less expensive accounting processes. With automated systems, businesses and consumers can enjoy reduced manual tax-preparation tasks and streamlined payment updates.

? Fewer transaction fees. Open Banking paved the way for account-to-account (A2A) payments that allow shoppers to pay for goods and services directly from their bank account. Consumers can even link their bank accounts to a merchant’s app or a web page and make payments in one click. Paying directly from bank accounts removes all the card processing fees and benefits both merchants and consumers. Any business that transacts online can take now take instant bank payments, without using card networks.

? Accelerate customer onboarding. Collecting financial information at sign-up is secure and automated with proof of income and bank account ownership.

Why does Open Banking matter?

? It creates more competition for banks and challenges them to offer better products and services for a better price

? It shifts the focus from generating funds for banks to improving the customer experience, and

? The new way of banking allows more space for innovations and encourages companies to find solutions to long-running issues

? Opens new revenue streams

According to?Mastercard’s 2022 New Payments Index, which surveyed 35,040 people across 40 countries, more people are utilizing open banking than they may be aware of. While only?50%?of respondents reported knowing about open banking, roughly?67%?are actually using it for tasks such as bill payments, banking, and making buy now, pay later transactions. This suggests that open banking is becoming a more mainstream method for managing finances globally. As open banking continues to gain popularity, even more people will likely begin to utilize its benefits for secure and convenient financial management.

Who benefits from it?

Open Banking has existed in some form or another for quite some time. But it’s only now making headlines as the kind of services it enables, from account aggregation to payment services are being embraced by?consumers?and?businesses.

In places like the U.S., innovative fintech companies are using data to provide tailored financial services to consumers, while banks recognize the commercial opportunity and develop services to let consumers share their data. It's a win-win situation that's changing the way we bank.

Now in the past, the relationship between traditional banks and consumers was very clear-cut: banks held the majority of the power, while consumers were reliant on them. However, with the advent of open banking, this power dynamic has shifted. Consumers are now?in control of their finances?and have more say in their choice of financial provider. With the ability to make informed decisions about their financial data and how it is shared,?consumers?are firmly in the driver’s seat making them benefit the most, including?SMEs.

While only?50%?of respondents reported knowing about open banking, roughly?67%?are actually using it for tasks such as bill payments, banking, and making buy now, pay later transactions.

To make the best financial decisions, consumers need access to as much information as possible. With Open Banking, all your accounts are linked together in one app and available on a single platform, giving you the tools you need to make the most beneficial decisions for your financial well-being.

But what about adoption?

Open banking efforts are a big deal for banks, regulators, and TPPs (Third Party Providers), and consumers should eventually have more options for managing their money, borrowing, and making payments. By proactively tailoring to your profile and making the recommendations via an App or a TPP without you even asking, providers can constantly develop new services that will greatly increase the quality of your banking experience.

In the area of adoption, Open Banking will continue to change the way we bank and use financial services in the modern world and the market is growing steadily. A?report?by Allied Market Research announced a?24.4%?growth and predicted the market value will reach over?$43 billion?by 2026.

Open banking adoption is about more than just numbers. We need to understand where it's happening to plan for the future. And while fintech companies are competitors they are also partners, and to get most of what it offers, banks must update their own systems before addressing the outside world. Examining IT enterprise from multiple perspectives is key to success. Contrary to popular belief, it's not just about APIs; internal order matters most.

What about Competition & Ethics?

Today Open Banking is primarily used for?income verification,?risk assessment, and?data insight: functional tasks that help lenders to vet and verify the consumers they’re dealing with. And while all this is good, making banking data portable isn't always good for borrowers. It is after all about data.

Banks forced to share data with fintechs, even against consumers' wishes, could lead to an unlikely yet dangerous scenario. With advanced algorithms and independent data sources, fintech lenders could become more powerful than traditional banks, leaving consumers worse off. The issue lies in the "screening ability gap" between banks and fintech firms. While data sharing can increase competition and benefit consumers, giving too much power to fintechs may lead to higher costs for consumers and hurt the banks' ability to compete.

Share and win or keep private and lose? That seems to be the choice for borrowers. By sharing their information, borrowers can appear creditworthy to lenders and gain better loan options. However, those who choose to keep their data private may be perceived as a risky bet and face limited loan options and higher interest rates. This raises the question: is privacy worth sacrificing for better financial opportunities?

How can Open Banking transform your business?

Open banking and APIs are speeding up innovation and helping address some of the traditional pain points associated with cash management. Manual and repetitive tasks can now be automated securely thanks to APIs. Systems can be more easily integrated with one another and data can be shared in real-time.

In the world of business, the whole point of real-time data is not only to have the ability to extend information real-time, but also to get a response back in real-time. APIs are a way to keep up with the speed required for that journey. If you are doing something with real-time payments, the way you are going to interact with the network will be through APIs so you can have the proper on-demand and real-time experience that would benefit your end-to-end interaction with your customers.

An everyday example of this is in the payment space, where invoice approval, vendor preferences, and real-time payments can take place in a single step, helping to create an improved experience both for you and the partners you transact with.

Today Open Banking is primarily used for?income verification,?risk assessment, and?data insight: functional tasks that help lenders to vet and verify the consumers they’re dealing with.

While there is still so much to do.?Customer trust?is key for Open Banking to develop and be adopted widely. To win every consumer in the market, the whole industry has to deal with 2 main things which are: Safety and security of private information, and better-updated information about what we can and cannot do with the information in our hands.

In conclusion,?“With great power comes great responsibility.”?The most quoted line from Spiderman was actually a line from his uncle Ben. Being the sole decision maker with whom you share your financial data with, you need to be very careful whom you share that information with. While open banking relies on sharing data, you might prefer to keep your information private.

Is privacy worth sacrificing for better financial opportunities?

To succeed in Open Banking, banks in particular, should start thinking like platform companies, leveraging their existing business models to connect people and processes with assets, and backing that up with technology infrastructure that can manage interactions from internal and external users. At the heart of those interactions are (APIs) that when used properly would be able to create an ecosystem of connected users engaging with various stakeholders, with customer experience in mind to enable financial inclusion in an effort to provide greater access and equal opportunities to the global population.

With all of these being said, Financial inclusion and prioritization are inextricably linked. The extent to which one is included financially directly correlates with the level of priority given to their financial needs. In other words, financial inclusion serves two audiences: unbanked people outside of the financial system, and underbanked people inadequately served by the financial system. Regardless of whether one is banked or not, the permissioned sharing of customer data is paramount for building a financial system that works for all.