Open banking is a broad term for any finance-related service that can be used without the need for companion apps or services. Open Banking has become mandatory across the European Union and is already widespread throughout the member-states. Open Banking has been around for years but was not actively adopted by consumers because of lack of trust and lack of support from banks, which contributed to the slow growth of Open Banking market segments such as Open Banking APIs.
So, here is Open Banking Explained – a thorough guide of the market and its state in 2022!
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What is Open Banking and how it works?
In 2018, the European Union finally passed a regulation that made mandatory Open Banking and Open API standards across all member-states. Open banking enabled customers to freely share their financial data with third-party companies who could then offer tailored services without having to ‘reinvent the wheel’. For example, Open Banking APIs would allow for a new aggregator service to offer customers international money transfers at lower costs. Open API standards allowed financial institutions to share their data safely and securely.
Open banking works by allowing third-party access to the customer’s account information via Open API standards which are secure because Open API allows 3rd party applications to interact with a user’s Open Banking account without being able to withdraw money from it.
Pros and cons of open banking
An Open Banking marketplace (one where open banking concept is in power and active) brings a lot of benefits for consumers. Open Banking allows customers to gain access to tailored services, such as personal finance management tools and better comparison websites that offer savings on credit cards and mortgages.
Open Banking APIs also allow banks and FinTech (Financial Technology) companies to securely share customer data in order to create new products and services. Open banking also levels the playing field for new entrants who otherwise wouldn’t be able to compete with larger banks and financial institutions. Open Banking is the key driver behind the Open API movement as Open APIs allow for secure data sharing that’s scalable enough for such a huge market.
It does, however, come with its risks. Open Banking can also provide opportune ities for criminals to defraud customers by using fraudulent Open Banking APIs to access their accounts. Although such a threat is highly unlikely, it must be accounted for.
Open Banking also can create large centralized databases of financial information which, if breached, could lead to identity theft and fraud. Open Banking is not an excuse for non-compliance with GDPR rules. Open banking is aimed at giving the customer more control over who accesses their information and how it’s going to be used. All companies must take special care to protect their customer’s privacy by giving them the option to easily opt-out and/or delete their info on demand.
Future of open banking explained
Although Open Banking is now mandated across the EU, many large banks and financial service providers have been slow to adopt Open Banking APIs. Bigger players such as HSBC and Santander both initially tried to discredit Open Banking and were reluctant to integrate Open APIs into their apps and banking platforms, trying to maintain a solid grasp on the market.
But as the current trends have shown, even the biggest players were either forced to or embraced the transition and the customers are benefiting from it. All competitors in the financial markets have become compliant with the regulation that has been introduced union-wide.
We hope that this guide was helpful and provided you with sufficient knowledge of the basics behind open banking, its pros, cons and the future for this technology!