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Open banking is fairly well established in the EU and parts of Asia Pacific, but has been slower to take hold in the United States. Open banking has the potential to transform the way banks, businesses and consumers share and use financial data. So what is Open Banking and why should you care?
What is open banking?
Open banking is the practice of securely sharing financial data between banks and third-party providers such as fintech apps. Before open banking became available, consumer financial data was controlled by big banks. Now consumers can manage and access their financial information across multiple platforms—all while getting a smoother, more personalized experience.
And by leveling the playing field for start-ups and technology platforms, open banking can stimulate innovation. It is pushing big banks to upgrade their offerings to compete for business with smaller and newer banks. This can benefit consumers, who often end up paying lower costs while benefiting from improved technology and customer service.
Before you try Open Banking, you should know what kind of information you will be sharing:
- account type
- name on the account
- Account opening date
- Transactions including how much you spent and where
- Bank balance
- payment details
How does open banking work?
Open banking uses application programming interfaces, or APIs, which are software intermediaries that allow two programs to communicate with each other. Although there are risks in using open banking platforms, APIs offer a level of security when sharing your financial information.
Once a third party receives the information from your bank, they can use the information to offer you personalized solutions. For example, apps like Mint and You Need a Budget (YNAB) aggregate your data using Open Banking APIs, which you agree to by accepting the terms and conditions.
Here is how Open Banking affects the different players in the financial services ecosystem.
- Financial service providers: Open banking encourages innovation among banks and third-party providers and leads to more choices for consumers.
- Company: Open banking data helps companies understand their customers’ needs and enables them to tailor their product and service offerings.
- Consumer: Open banking gives consumers more control over their financial information and provides access to more efficient and personalized digital money management tools.
How to apply for Open Banking
Open banking is still in its infancy in the US, but consumers may already be using open banking services without even knowing it. Popular finance apps, including Robinhood and Chime, use open banking software.
And some of the best budgeting apps like Mint and Personal Capital use open banking data to help consumers organize and manage their money in one place. Mint aggregates your bank details to track your spending and make personalized budgeting suggestions. Without open banking, such platforms would not exist or would only be offered by traditional banks.
Due to the lack of a regulatory framework and government initiatives to support open banking, US companies that want to implement this technology are largely on their own. Financial institutions interested in open banking can develop their own APIs. Alternatively, they can turn to the companies that offer the banking software they already use. Many of the leading banking software providers offer open banking solutions such as API portals.
Pros and cons of Open Banking
Open banking has many benefits, but there are also some potential pitfalls.
- Innovation. Fintech startups and other developers gain access to consumer data through open banking, fueling innovation in the financial services industry. This leads to more financial management tools for consumers.
- Simplified credit process. Easier data exchange between banks and fintech companies will pave the way for faster credit decisions. For example, a vendor can request your transaction and payment history through open banking APIs.
- Personalization. More than ever, consumers are interested in personalized digital tools to help them track expenses, stay on budget and achieve their financial goals. Open Banking allows third-party apps to use your financial data to make suggestions tailored to your situation.
- Lack of regulation. The US has been slow to adopt open banking standards, but the Consumer Financial Protection Bureau (CFPB) will soon establish rules for sharing consumer data.
- security concerns. Sharing your financial information online is not without risk. Open banking security is taken seriously, however, and there are safety precautions that we cover in the next section.
How secure is Open Banking?
You may be understandably concerned about the security risks of sharing financial information across platforms. But an important security feature of Open Banking is that you do not share your banking information with any third party. Instead, you authenticate yourself directly with your bank. In addition, financial institutions cannot share your information without your consent, which you can withdraw at any time.
Ultimately, Open Banking enables banks and third-party providers to offer their customers a more personalized and streamlined experience. If widely adopted in the US, it will empower consumers to take control of their money and help them make more informed financial decisions.
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