What Is Open Banking? | Banking Advice 2022 (2024)

What is Open Banking?

Open banking means more than one bank branch is open to customers. Through the concept of open banking, you allow third-party financial services companies – with your permission – to access your personal financial data. This is done with technology known as application programming interfaces or APIs. An API is software that allows two applications to communicate with each other.

Promoters of open banking praise the possibility of improving the availability of financial services. For example, open banking could allow you to more easily share your financial information with mortgage lenders or accountants, which could give you a broad dashboard-style view of your finances. and may allow you to connect your bank account to a loyalty program. You can even authorize a third party to make payments from your bank account on your behalf.

US open banking adoption has been slower than its use in Europe and Asia. In fact, a 2021 survey by financial technology company GoCardless found that more than half of Americans know nothing about open banking. However, experts say open banking will grow in the US

However, open banking adoption comes with risks for consumers. Data security, privacy breaches, fraud and cybercrime rank among the biggest concerns, especially as more and more players in the financial services sector adopt open banking. .

• When you apply for a home loan, you may be granted temporary access to financial documents so that you can electronically provide proof of income to the mortgage lender. This helps avoid having to send bank statements via the website or by email or fax.
• Setting up a checking account, savings account, or certificate of deposit can be quicker than before because you’re not required to enter your financial information manually.
• Finding better, more personalized financial products, such as credit cards, can be less of a hassle for consumers thanks to API-powered financial data sharing.
• People with little or no credit history may have a better chance at qualifying for loans. That’s because open banking can allow lenders to look at information like payroll data or rent payment history to determine an applicant’s creditworthiness.
• Open banking can provide a clearer view of your finances by aggregating data from several sources, such as checking, savings and investment accounts.
• For businesses, advantages can include faster bill payments, simpler sharing of financial data with accountants, and offering loans more tailored to their needs.

• Data security. Because you are sharing your financial data with a third party, you may be more vulnerable to a data breach. For example, your bank may – with your consent – share your data with one of their financial service partners (such as a credit card company). If that partner becomes the victim of a cyber attack, your financial information could be in jeopardy. According to EY 2018 research, almost half of the opinions globally are negative about the open banking hub in terms of data protection and cybersecurity.
• The hindrance of marketing. Opting into open banking can lead to getting more offers on products and services than you would like. Why? Your data is available to more companies that want to sell to you. And even if the offers are appealing, the products or services may not serve your current needs.
• Lack of regulations. As open banking grows, companies and government agencies continue to grapple with how to regulate it. In the US, financial service providers largely oversee open banking on their own. U.S. financial services regulators have issued guidelines on open banking but have so far not imposed strict rules, although that situation could change as banking services open start.

James E. Lee, executive director of the Identity Theft Resource Center, said the proliferation of APIs made it difficult for him because of the technology’s security vulnerabilities and the relative lack of oversight that the companies have. API received.

Lee said his organization has tracked a number of data breaches due to faulty APIs “and we anticipate that we will see more in the future until security tools and methods are available.” Improved API.”

So what’s in store for open banking?

There are both pros and cons as open banking gains traction.

Open banking could foster more competition in financial services, which could give consumers an edge. However, it could also strengthen the dominance of large banks, causing small and medium banks to rise.

Additionally, while open banking makes it easier for consumers of financial services, it can make people feel that they are losing control of their data – even though they are the givers. permission to share their data.

Furthermore, questions remain about who actually owns individuals’ financial data. Is your financial institution the real keeper of your shared information, or does that responsibility lie with third-party companies? And just how many companies have access to your data? Despite those worries, financial services companies emphasize that it is ultimately the consumer who controls who sees their data and has the ability to conduct data sharing.

“Traditional financial institutions need to move away from old business practices and embrace open banking. Open banking helps set the stage for companies to create turnkey solutions, which helps consumers manage their finances without the hassle of matching through multiple apps, said Marwan Forzley, CEO of Veem, which operates a payments platform for businesses. .