Open Banking – The Future Of Banking
Open banking is also known as “open bank data.” Open banking is a banking practice that provides third-party financial service providers open access to consumer banking, transaction, and other financial data from banks and non-bank financial institutions through the use of application programming interfaces (APIs). Open banking will allow the networking of accounts and data across institutions for use by consumers, financial institutions, and third-party service providers. Open banking is becoming a major source of innovation that is poised to reshape the banking industry. Open banking is the system of allowing access and control of consumer banking and financial accounts through third-party applications. Open banking has the potential to reshape the competitive landscape and consumer experience of the banking industry.
Open banking raises the potential for both promising gains and grave risks to consumers as more of their data is shared more widely.
Under open banking, banks allow access and control of customers’ personal and financial data to third-party service providers, which are typically tech startups and online financial service vendors. Customers are normally required to grant some kind of consent to let the bank allow such access, such as checking a box on a terms-of-service screen in an online app. Third-party providers APIs can then use the customer’s shared data (and data about the customer’s financial counterparties). Uses might include comparing the customer’s accounts and transaction history to a range of financial service options, aggregating data across participating financial institutions and customers to create marketing profiles, or making new transactions and account changes on the customer’s behalf.
What Open Banking Has To Offer
Open banking is a driving force of innovation in the banking or financial industry. By relying on networks instead of centralization, open banking can help financial services customers to securely share their financial data with other financial institutions. For example, open banking APIs can facilitate the sometimes onerous process of switching from using one bank’s checking account service to another bank’s. The API can also look at consumers’ transaction data to identify the best financial products and services for them, such as a new savings account that would earn a higher interest rate than the current savings account or a different credit card with a lower interest rate.
Through the use of networked accounts, open banking could help lenders get a more accurate picture of a consumer’s financial situation and risk level in order to offer more profitable loan terms. It could also help consumers get a more accurate picture of their own finances before taking on debt. An open banking app for customers who want to buy a home could automatically calculate what customers can afford based on all the information in their accounts, perhaps providing a more reliable picture. Another app might help visually impaired customers better understand their finances through voice commands. Open banking can also help small businesses save time through online accounting and help fraud detection companies better monitor customer accounts and identify problems sooner.
Open banking will force large, established banks to be more competitive with smaller and newer banks, ideally resulting in lower costs, better technology, and better customer service. Established banks will have to do things in new ways that they are not currently set up to handle and spend money to adopt new technology. However, banks can take advantage of this new technology to strengthen customer relationships and customer retention by better helping customers to manage their finances instead of simply facilitating transactions.
Before banks offered open banking, the closest thing available were aggregation sites that combine users’ account information from all their financial institutions so they can see it in one place. Such services accomplish this by requiring users to hand over their usernames and passwords for each account, then scraping the data off the screens of those accounts. This practice has security risks and the results of screen scraping are not always entirely accurate, making it difficult at times for users to identify transactions. In addition, users may find that not all of their financial accounts are compatible with account aggregation services, preventing them from getting a true or complete picture of their finances. APIs are considered a more secure option because they enable applications to share data directly without sharing account credentials.
The Risky Side Of Open Banking
According to the Deputy Governor of the Reserved Bank Of India (RBI), open banking may potentially pose significant risks and concerns around financial privacy and data security, customer liability, cybersecurity and operational risks. In open banking frameworks, risks associated with the loss or theft of personal data on account of poor security, data protection violations, money laundering, and terrorist financing concerns cannot be ruled out. Open banking is likely to alter the competitive landscape of the financial services industry, which could benefit consumers by increasing competition, but could also have the reverse effect and increase consumer costs if it leads to consolidation in financial services, due to the natural economies of sale from big data and network effects. Resulting market concentration could do more than offset any cost advantages to consumers.
How The Risk Factor Can Be Removed
Large scale adoption of open banking frameworks should ideally be preceded by strong data protection and privacy laws. Looking at the risks which Open Banking has and carries India has already taken a step by Introducing the Personal Data Protection Bill in 2019. This Bill protects the personal data of individuals and establishes a Data Protection Authority for the same. Blockchain can also help evolve the system by recording private transactions and activities to inform and reinforce future legitimate interactions and help prevent irregular ones. This will increase the viability and the success of open banking in India and other parts of the world.
How Open Banking Will Help The Future Of Finance
Open Banking will cause the rapid growth of financial services, taking the user experience to the next level. Many procedures in the digital banking solutions will become simple and automated. With access to the banking APIs, FinTechs can provide users with opportunities to improve their financial lives. Open banking has the potential to increase existing revenue streams and add new ones while expanding customer reach for financial institutions. It can also create Revenue sharing ecosystems.