The concept of open banking means enabling third-party software providers and banks to build new, customer-centric financial applications and services. It’s about giving customers control of their financial data. Customers allow other third-party organizations to access their data (with their permission) and stimulate innovation in the Fintech industry.
What is open banking and how does it affect you?
In traditional banking, banks have the highest impact on their existing business models. However, open banking enables more opportunities to work with Fintech companies and focus on innovation and create new products that benefit everyone in the ecosystem.
The term open banking refers to two different pieces of financial regulation:
- The Competition and Markets Authority’s (CMA’s) “Open Banking Remedy.”
- European Payment Services Directive 2 (PSD2).
The first one results from an investigation in retail banking by the CMA, a non-governmental British authority, which has found different holes within the system and has laid out a set of remedies to improve the industry. These include open banking standards.
The second one is a European Directive that aims to regulate payment services and payment service providers within the EU. The main objective is to increase competition and participation in the payments industry and also from non-banks.
Benefits of open banking
Open banking APIs are assets for all the financial services firms, as they enable them to improve their existing customer engagement as well as appeal to new prospective customers by meeting their changing demands on accessing their financial information. It also builds new digital revenue channels focusing on banking APIs.
You may have already used third-party financial management tools that open banking would improve on. Apart from the banks, regulators and startups. Consumers will have more options in managing money, borrowing and making payments. As a consumer, you can connect your bank account with a website or an app that tracks your spending behavior and provide a new product recommendation like a savings account, investment options or credit cards.
What about Privacy? Is consumer data safe?
Companies involved in open banking should not automatically share consumer data with third parties. Open banking completely relies on sharing the data, but as a consumer, you might prefer to keep your information private so no one will get access to your data. If you prefer to stay banking the way you currently do, you can, and no one will force you to change or opt into an open banking space.
All the products using open banking are required to register with The Competition and Markets Authority’s (CMA’s) “Open Banking Remedy and Financial Conduct Authority (FCA),” either in the UK or via the EU regulators. You can also validate the third-party company you are using for your financial management tools. They should also tell you on their website or mobile app if they are authorized, along with their registration number.
As long as they are authorized, providers will only have access to the data needed for the service you have signed up for. Make sure to find out how well the third party can secure your information and how they will use your information before sharing your data with them.
Read about Consumer data (PII): Where, what and who is protecting it?