Open banking refers to the collective practice of providing third-party financial service providers with access to bank related data. Essentially, the access to the data that banks hold is provided to third-party players. This is certainly done with the consent of the customers. 

The said third-parties get access to the banking data through an Application Programming Interface (API). The third-party providers (TPPs) , once having gained access to the banking data, help customers manage, monitor and facilitate transactions and other banking actions with much ease. 

Open initiatives have been on the rise for decades now. It is not a new thing for people to be sharing their banking data. Fundamentally, open banking is when banks open up their Application Programming Interfaces to allow third-party providers to obtain financial information of customers. This happens only when a customer consents to provide third-party providers with their banking information to further enhance the efficiency of the banking process. 

In other words, it allows non-bank institutions to offer the functions that are performed by a bank. A customer can authorize an app to access their information. These apps, even though run by third-party service providers, cannot access the data without the customer’s consent. That is where the APIs come in. 

The APIs that the financial institutions use for the purposes of open banking, provide customers greater transparency into their own data. Open banking enables services customized as per your finances. The data hence shared can then also be utilized for developing apps and services. 

What is API?

Application Programming Interfaces (APIs) are a set of codes and algorithms that define the interaction relationship between the various components of the software. They enable different applications to communicate with one another. 

APIs in the past have been seen being used to bridge the gap between developers and payment networks and would also show billing details on the bank websites. But now via open banking APIs deliver commands to the third-party providers.

Banking-as-a-Service (BaaS) is one of the major elements of open banking and APIs are an essential part of that. BaaS is the making available of banking products to non -banking third parties. And this happens via APIs.    

How Does Open Banking Work?

Open banking works when the banks make their data available in the form of secure APIs. Then the Third-party fintechs get connected to the APIs and make use of the data that the APIs have furnished. This can happen smoothly only when a digital ecosystem is in place that efficiently facilitates the working relationship between the fintechs and the banks. 

Once all the parties involved in the initiative agree on the instructions on how the third-parties can use the bank-provided customers’ data, the banks can implement the APIs and the process can work out smoothly. 

What Data is “Open” in Open Banking?

We have been alluding to the “openness” of open banking but let’s have a look at  the exact data that is being opened to the third-parties. 

Account Data

But of course, for financial transactions to take place the third-parties will need access to account data. This data can include, account holder’s name, account type, currency, date on which the account was opened, other transaction details like amounts or merchants. 

Product Data

This is the data regarding the financial services and products that financial institutions offer. While in earlier days you would require to go to a bank to know about the various services they provide, now, all you have to do is visit their website. Additionally, because of open banking these details are placed in a standard format which helps you with better options for making decisions related to your financial transactions.    

Making Payments

When you wish to transfer money from one bank account to another, traditionally you’d require to log into online banking. But thanks to open banking this process can be handled through apps, websites or software. (This is only when the bank account holder provides their express consent.)

Frequently Asked Questions About Open Banking

Evidently open banking is all about expediting the banking process and enhancing customer experience. But as it happens, as a concept it, widely lacks recognition and public awareness. Here are a few frequently asked questions. 

Will I be opting for open banking automatically?

No. The best part about it, which makes it efficient, effective and safe is that your account will have open banking only if you give your explicit consent for it. This consent needs to be given to the bank and to the regulated app or website of your choice. So, opting for open banking is a choice which is fully an individual’s to make. 

Can I control who has access to my data and how?

Open banking works with you choosing the regulated websites or apps you want to associate with and want to share your data with. So, you are the one who has the control over who has access to your data. In fact, you decide what information they get to access and for how long. No one can get access to your data unless you give consent, explicitly.  

What types of accounts can be used for open banking?

All the payment accounts that have the online or mobile banking facilities available, can be used for open banking. The types of accounts include, personal and business current accounts, credit cards and online money accounts. 

Can I use open banking if I don’t use online banking?

No. For you to use open banking for any of your accounts, you must have online or mobile banking enabled. Once you’ve enabled online or mobile banking for your account, then you can go ahead and use it.  

Are there any extra online banking charges?

The provision is free. So, no, to begin open banking with your account, no extra charges will be levied by the bank. But, some regulated websites or apps may charge you for the services they provide. 

How can I cancel the online banking service?

If you no longer wish for your banking data to be shared with the said regulated app or website, you can simply go to the app or website and withdraw your consent. Or you could contact your bank or financial institution and make your wishes clear, about not wanting the app or website to have access to your data anymore.

Facts & Figures

Open banking is quite a trend. So much so that according to a UK based research of 2018,  it stands to boost the GDP of the UK by €1 billion, annually. 71% of the financial institutions feel that it is a “positive initiative” and 77% agree that it is a “radical change for financial services”.  84% of financial services companies are investing in open banking services and products. 77% of banks in Europe plan to invest in similar initiatives for their commercial customers. 8 out of 10 financial firms are adopting or planning to adopt open banking, or are interested in doing so. 

This was just in the UK and in 2018. The global open banking market has grown exponentially. It was expected to be valued at $13.9 billion in 2020, was expected to grow from $15.13 billion in 2021 to 19.14 billion in 2022 at a compound annual growth rate (CAGR) of 26.5% . Currently, the market is projected to grow to $48.13 billion in 2026 at a compound annual growth rate (CAGR) of 25.9%. Many forecast the global market for it to reach $123 billion by 2031.

Moreover

Corporates expect open banking to provide them with better banking access with wider options and larger reach. The global percentages are: 27% is to gain access to convenient and innovative banking services, 22% is to allow them to reach more clients and partners, 18% is for optimizing the efficiency of SME and corporate processes and 18% again for reducing complexity and implementation costs for bank connectivity. The percentages in Europe are: 27% is to gain access to convenient and innovative banking services, 22% is to allow them to reach more clients and partners, 21% is for optimizing the efficiency of SME and corporate processes and 15% for reducing complexity and implementation costs for bank connectivity.  

According to reports, in 2021, North America was the largest region in the open banking market. And in the forecast period, Asia-Pacific is expected to be the fastest-growing region. 

Finally

As customers  we are always looking for more ease and convenience in terms of the financial decisions we make. Same goes for small business owners or large corporations. Open banking, or open financial data allows new and better solutions to such needs. The market has been changed in many ways. It has become such an obvious part of daily life that its existence, while highly appreciated, is hardly ever acknowledged. Open banking is all set to change the finance sector by introducing more ease, transparency and efficiency. Open banking has revolutionized financial management forever.

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