Open Banking Explained in the Simplest Terms

Open banking exactly means what you thought of it. Banks are open to interacting with third-party providers and sharing customers’ financial information with ease. 

But don’t judge this banking system by its name. It’s open but safe!

Open banking becomes a completely different and innovative concept when we study the fundamentals and the purpose behind the system.

In this article, we’ll help you understand all about open banking, crack down on the myths revolving around the concept, tell you the benefits, and present you with some amazing resources to get a stronghold on the whole open banking buzz in the market.

Let’s get started with the basics.

What Is Open Banking?

Open banking is where banks and other financial institutions open your financial data to non-bank regulated providers.

The data generally consist of your transaction history, account information, and product and service-related data.

The practice calls for banks to use APIs (Application Programming Interfaces) to extend data to other providers.

Now you may ask, what’s an API?

APIs act as software intermediaries that allow two programs to communicate with each other.

In simple terms, Open Banking is the term for using open technologies or APIs to safely flow consumer financial data between different financial services or platforms.

Moreover, Open Banking enables customers to compare and buy financial services from different providers effortlessly.

In fact, the three major stakeholders in Open Banking are:

• Banks and financial institutions
• Fintech companies
• The customers

For example, to register with a Fintech company service, you must allow the platform to access a certain portion of your financial database. The platform communicates the same with your bank and gets access to limited information only if you choose to do so.

However, only recently has open banking become popular in the US.

Is Open Banking Safe?

Yes, Although the concept may sound worrying because of the monetary aspects involved, open banking only functions if you (the consumer) permit it to grant access to your data. 

Moreover, banks are constantly working on a better and more secure infrastructure to flow their customers’ data systematically.

Unfortunately, some myths surround open banking quoting it as a ploy allowing banks to sell data easily and legally. At the same time, the intention is quite the opposite.

You see, open banking was envisioned for the ultimate purpose of improving financial services for customers. Therefore, it complies with no hidden transactions hampering the customer’s privacy.

But how does open banking differ from traditional banking?

The main difference is that while the former allows third-party to access your financial data quickly, the latter restricts this access to specific people and only allows them to view limited information.

Let’s better understand how open banking works.

How Open Banking Works?

As we discussed earlier, open banking is streamlined on a set of APIs that allows both parties to access, use, and share information.

Food For Thought: Create personal APIs and get consumer data easily.

No, it doesn’t work like that.

You see, the government and regulators first agree upon APIs. And then, the banks build APIs via developers and implement them on various applications.

And ultimately, businesses and markets use them to advertise their products and services to the targeted customer base.

Did it sound technical?

Let’s understand it with a simple example. 

Suppose you want to track your personal finances.

Meet John! John, just like all people, is facing issues with his personal finances. That’s because almost every process is manual and takes a lot of time as it involves multiple visits to the bank, hefty calculations, and taking rigorous notes of crucial details.

However, with the rise of technology and digital transformation, the landscape of personal finance has changed. John wants something quick and tech by which he can manage his personal finances sitting at home.

This is where open banking comes in. It offers an elevated and enhanced experience for managing personal finance.

With open banking, John can now easily view his account balance, transfer money instantly, and perform various other financial activities.

Gone are the days of manual calculations and visits to the bank – open banking has revolutionized how we manage our finance.

While accessing bank balances from anywhere is a simple use case of open banking, it has much more to the list.

#1. Cash Management

Let’s be honest; our cash is spread out in multiple accounts or sources, like savings accounts, home loan accounts, study loan accounts, accounts receivable, etc. 

With the owner’s permission, the APIs associated with these bank accounts can help you track, monitor, and centralize your transactions and enable the funds’ growth by channeling them to relevant sources.

#2. Interactive Banking

Open Banking is also utilized to provide customers with a user-friendly banking model. The AI-enabled apps can significantly enhance and provide a more personalized banking experience at your fingertips.

#3. Digital Cheques

Aging forward, open banking will allow companies to build open APIs that can scan cheques, ensure authenticity, and process them virtually. Thereby making the tedious work of cheque transfer convenient and paperless.

#4. ChatBots

AI-driven financial advisors analyze your financial status and drive possibilities of your investments, recommendations, and many more. Who knew managing finances would be this easy?

Benefits of Open Banking

Open banking has revolutionized the way customers make their financial decisions. One of the leading benefits of an open banking system is providing customers with better, faster, and safer financial services.

The age-old apps that required you to sign in to your bank accounts with the credentials posed significant risks to your financial privacy. But with open banking, you don’t require to share account details and yet be open to new markets for better services. 

Here are some other benefits open banking offers to its customers.

#1. Security

Growing distrust among customers about financial institutions’ security and transparency is a challenge. But open banking systems have found a way to deal with that.

Now, customers can choose who gets to see their data and have total control over it. Additionally, many recent innovations ensure that safety measures are updated with industry policies. 

Keeping in line with that, all third-party software has to meet the highest security standards to operate in the market.

All that has given the end users confidence to share their financial data with the open banking companies as they know they’re in charge of it.

#2. Improved Customer Experience

Unlike traditional banking models, open banking systems allow customers faster and safer credit access. Whether you want to pay online, invest or bet, moving money was never this easy.

This results in an improved customer experience and smooth finance management, all with absolute security.

Secondly, open banking systems quickly address the day-to-day consumer’s problems. By introducing innovative products like Buy now Pay later, salary on demand, and secure online payments, they’ve created a paradigm shift in consumer behavior.

The latter has compelled other companies to enhance their products and services, creating a finer customer experience.

#3. Improved Personal Finance

Open banking has made consumers smart enough to manage their personal finances through many products that provide a unified view of customers’ data to their screens.

Earlier users couldn’t access such information.

But now, with data sharing, they can make more informed decisions about their investment, saving plans, and budgets.

#4. More Options

An open banking system challenges the traditional banking model. It has opened the door for new players to come up and serve customers.

This growing competition has benefited consumers as now they have more financial service providers. If they are satisfied with one, they can look for other companies for better deals.

Moreover, with more players entering the market, service cost is likely to go down, again being a boon to the end user.   

Impact and Risks of Open Banking

Key Impacts

Open banking is a potential disruptor in the finance field which has changed how people think and plan their financial decisions. 

It’s solely aimed at empowering people to have full control over their data and sharing key points which could help them make better and more informed financial decisions.

Another key impact of the open banking system is that it has shaken the foundation of traditional credit models and opened a new window of opportunities for people to get frictionless credit access.

There has been almost no innovation in the banking sector for a long time, but thanks to open banking, people can now choose from a pool of innovative products that makes their life easier and better.

Risks

Down the lane, the risk of consumer data mishandling and money laundering in an open banking system can’t be discarded.

Although open banking allows consumers to have control of their data, it may have no obligations over the wide-ranging third-party firms associated with the system. This may pose a serious threat to data reselling and loss of personal information.

If such a situation arises, there are no explicit arrangements to redress customers’ grievances. That limits the adoption of the open banking system on a large scale.

Open banking framework has many shareholders for building apps, providing payment gateways, and ensuring security. All of these have a massive amount of data, such as financial transactions, customer account details, and others with them.

Cybercriminals always look for ways to break into these systems and steal data.

To avoid that, open banking systems must constantly upgrade their safety measures. But again, it can be hard to avoid such fraudulent activities.  

Learning Resources

Now that you know the basics of open banking, let’s look at some resources you could drill down on and know more about it.

#1. Open Banking PSD2 and GDPR

The API and Open Banking with GDPR course on Udemy is a comprehensive guide to understanding APIs and open banking and how they comply with the General Data Protection Regulation (GDPR).

The course, taught by Piyush Singh, covers essential topics such as API design and development, open banking principles, and GDPR. It includes practical examples and real-life scenarios to help students understand concepts better.

By the end of the course, you will have a thorough understanding of open banking and all the related concepts.

#2. Open, Digital, and Future Banking

This course by ICMI learning is filled with case studies from the banking industry.

It gives beginners and banking aspirants a comprehensive roadmap to open banking, digitization, and the future of banking with respect to application programming interfaces (APIs).

Moreover, you’ll learn quite practically by studying the case study of DBS and how it became the best bank in the world.

#3. Future of Fintech

The course Future of Fintech on Udemy offers an in-depth exploration of the latest trends in financial technology and its impact on banking, data privacy, and financial regulations. 

The course covers open banking, the EU’s General Data Protection Regulation (GDPR), and the revised Payment Services Directive (PSD2).

Moreover, the course is designed for individuals interested in understanding the future of fintech and how it shapes the financial landscape.

#4. Open Banking by Linda Jeng

Open banking by Linda Jeng defines the concept of open banking from the early stages and how it slowly paved its way from the UK and the European Union to Asia, Africa, and lastly, America.

Preview	Product	Rating	Price
	Open Banking		$80.90	Buy on Amazon

This book defines the concept of ‘open banking’ and explores key legal policy and economic questions raised by open banking.

#5. Open Banking Strategy Formation

Open Banking Strategy Formation examines the forces likely to influence the evolution of open banking at an industry level. 

Preview	Product	Rating	Price
	Open Banking Strategy Formation		$49.99	Buy on Amazon

This book is an excellent knowledge portal for businesses and marketers to let know the right time to integrate open banking into their business ecosystem.

#6. Regulating Open Banking

As the name says, Regulating Open Banking examines the regulatory approaches to open banking with respect to legal systems, transaction costs, public choice, and OB infrastructure.

Preview	Product	Rating	Price
	Regulating Open Banking (Routledge Research in Finance and Banking Law)	No ratings yet	$59.95	Buy on Amazon

The book is excellent if you want to perform a comparative analysis of the open banking system between the West and the Asian economy.

Wrapping Up

When it comes to financial management, open banking is a game-changer.

By using APIs to transfer financial data between banks and non-bank providers securely, Open Banking enables customers to compare and purchase financial products and services with ease. 

The popularity of Fintech is growing day by day, and with it, people understand the flexibility they get with open banking.