Fintech, Neobanking

What is Open Banking? And Why Should I Care?

An ongoing, global fintech wave (the sector raised nearly $280 billion in funding in 2018 and 2019) has propelled the rise of multiple innovative concepts and methodologies that are radically improving the existing structure of the financial sector. Open banking, sometimes referred to as ‘open banking data’, is another innovative idea revolutionising the banking sector. 

Simply put, the concept of open banking promotes the approved sharing of consumers’ transaction data and accounts data from banks and other financial institutions, to third party providers via application programming interfaces or APIs. These third party providers then analyse the data and generate unique financial solutions for the consumers based on their needs and demands. A close approximation would be – think of them like internet ads from Google or Facebook, except these offer you financial solutions. Here’s how it all began:

  • The open banking concept was first adopted in the UK and Europe in a bid to level the competition between new banks and old-and-established banks, as the latter had a near-monopoly on the sector. 
  • Though established banks had crucial consumer data, they did not utilize it to aid consumers. On the flip side, newly created fintech startups offered lucrative solutions to consumers based on the data held by the banks. 

Open banking may be set to reshape the banking sector by empowering consumers with disruptive financial products and facilities. 

How Does Open Banking Work?

Before privacy enthusiasts decide to pick up their internet pitchforks and leave, let’s make this clear – open banking can not occur without the consent of the consumers. Consumers retain the authorization to share their data with whomever they want and for the duration they want. 

When a consumer approves the sharing of their data held by banks and other non-banking institutions, APIs facilitate the means for the third party providers to access the data. These providers then analyse the data to constitute a financial profile of the consumer based on their financial activity, risk aversion, key spending habits and much more. 

For example, say you want to compile your monthly expenditures based on your transaction activity of your accounts in different banks:

  • You visit a website or download an app to do this task. 
  • The website or the app now becomes the third party provider and will ask for your consent to fetch your transaction data from your bank accounts. 
  • Once approved, your banks will confirm the same from you again. After confirming the data ownership transfer, the app or the website will fetch the data facilitated by APIs and offer you the required compilation of your monthly expenses. 

A point to remember is that the consumer has the authority to withdraw the data viewership rights given to the third party providers. 

Open Banking Advantages Are Heavily Customer-Centric

Open banking empowers consumers to better utilize their data by sharing it and taking advantage of customised products and services based on them. Let’s look at a few key avenues where the consumers can enjoy enhanced services via open banking. 

  • Since the consumer has the power to share the data with any entity, open banking is truly a free market. It has promoted healthy, but intense, competition among established banks, newer banks and other financial institutions to offer best services and products at reasonable rates. 
  • Open banking enables individuals and businesses to procure better loans at legitimate interest rates since they can easily provide their information to the loan providers. The latter can then analyse the financial activity and assess risk levels to then offer better loans, or no loans at all to individuals with troubling financial history. 
  • Fintech companies have started creating more specialized and individualized financial solutions for the consumers such as applications that can help an individual in better selection of car or a real estate piece based on their current as well as estimated future finances activity. 
  • Customers can also compare the best financial solution and product for themselves right from a savings account to an insurance scheme.

The Future Of Open Banking: Where Is It Headed?

Though open banking is reshaping the banking sector and empowering users simultaneously, it does come with some associated risk. There is indeed some uncertainty regarding data breach and theft, apart from the potential for misuse of data by trusted third parties. While there are authoritative entities that verify and regulate these third party institutions, data privacy remains a concerning issue. The future of open banking depends on the extent to which these third party institutions can succeed in protecting consumer data. A loss of faith in the concept will prompt a quick fall in its adoption, akin to its rapid rise. Also with the upheaval of ‘financial inclusion’ in the banking sector lately, the future of open banking depends on the efforts of open banking companies in incorporating individuals from low financial strata. 

With this being said, the rapid growth of the open banking wave and its popular acceptance among major economies of the world points at a bright future for open banking. By and large, we’re all optimistic, with analysts projecting a $43.15 billion open banking market by 2026 growing at a 24.4% CAGR. Carefully and well designed open banking structures will not only generate greater gains for the consumer but also aid in a massive exercise of decentralization of data traditionally held by established banks. 

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