Open Banking
The term “Open banking” refers to an innovative system of organizing banking activities between multiple parties, which implies that banks share access to their clients’ transactions and financial data with independent providers of services. Those services employ open APIs (types of interfaces enabling two or more programs to interact and work with each other, the abbreviation stands for Application Programming Interface), which aggregate and analyze the financial data of a client from different financial institutions, and put the results into use.
As a highly innovative concept, the system of open banking is supposed to affect the world of finance to a considerable degree due to its unique features, including increased transparency, providing more options to the clients, bringing more diversity and competition to the banking sphere. At the same time, though, the principles of open banking are also connected with more risks, so it’s worth studying its features more closely.
How Open Banking works
Nowadays, a growing number of banks offer the possibility of open banking to their clients. Before the start, a client is required to study the rules and conditions which describe how a service provider uses the data. A client has to give consent to such use, usually in the form of accepting the conditions of the bank. After that, an open API of the bank’s informational service provider gains access to the client’s data. This information is then used for both bank’s and client’s needs, being assessed, systemized and used as a basis for advice and selecting better options for the given client. Open banking also suggests conducting operations using the client’s account, if the appropriate permission is granted.
The main benefit of open banking lies in the principle of accumulating financial data from all sources, which enables an API to give more detailed and truthful analysis. By comparing client’s transactions and financial behavior in general, the API can make up thorough recommendations on such sensitive things as mortgage planning, or offer credit solutions or deposit options under better and more profitable conditions.
Open banking can also assist in managing complicated processes like changing main banking institution for the client, or choosing from too many offers from different financial institutions, or finding a solution for a specific problem.
From the bank’s point of view, the use of open banking is a benefit for the same reason, as it shows more precise information on the client’s credit history, and helps to conduct risks of granting a loan to this certain client. At the same time, the API might select the best option for both the bank and the client, reinforcing the client’s loyalty and further collaboration.
Other useful solutions available for users of open banking include innovative features providing persons of special needs with some additional assisting like voice commanding and adaptive interfaces. It might also support small businesses in the form of facilitating online accounting.
Open Banking as game changer
Services with similar functionality, that specialize in aggregating client’s financial data, have existed before the open banking was presented as a separate banking practice, but at the time those services were restrained by technological limitations, not providing a range of options comparable with the possibilities of modern open banking.
As open banking increases convenience and simpleness of financial operations for its customers in comparison with traditional banking, it’s a driving force of change in the banking sphere. Old and well-known banking institutions often base their marketing strategies on their established history and recognition. Thus, they offer their clients less profitable options because of the lack of necessity to allure customers with better conditions. With the open banking principles, it’s supposed that older institutions will have to actively compete for the customers. This may lead to decreasing of fees and charges, more lucrative terms of use, innovations in technology, and advanced service.
At the same time, it’s possible for older banks to benefit from open banking as well, enhancing their products and services and giving their customers a chance to actually control their financial activity instead of organizing their transactions only. The use of modern technologies and collaboration with service providers might be financially challenging, but in most cases it leads to optimization and rationalization of many processes, resulting in cost-saving and efficiency.
Open Banking hazards
Despite a long list of advantages, there are also some risks involved with the use of open banking. The first and the clearest danger of open banking is the security of personal data. Although the APIs used by the service vendors are designed to be highly secured, and most financial applications provide reasonable protection to the data they have access to, breaches and data leaks are still possible, as well as hacker attacks and inner problems. A situation where the third party providing informational services turns out to be fraudulent or outright criminal, are extremely rare, though it’s not totally impossible to happen.
At the same time, most institutions that use open banking provide their users with appropriate and full information on how to accept or decline certain options, provide or forbid access to certain financial spheres and how to monitor the activities to notice suspicious actions in time to prevent them.
