What Is Open Banking?
Open banking is also known as "open bank data." Open banking is a banking practice that provides third-party financial service providers open access to consumer banking, transaction, and other financial data from banks and non-bank financial institutions through the use of application programming interfaces (APIs). Open banking will allow the networking of accounts and data across institutions for use by consumers, financial institutions, and third-party service providers. Open banking is becoming a major source of innovation that is poised to reshape the banking industry.
- Open banking is the system of allowing access and control of consumer banking and financial accounts through third-party applications.
- Open banking has the potential to reshape the competitive landscape and consumer experience of the banking industry.
- Open banking raises the potential for both promising gains and grave risks to consumers as more of their data is shared more widely.
Understanding Open Banking
Under open banking, banks allow access and control of customers personal and financial data to third-party service providers, which are typically tech startups and online financial service vendors. Customers are normally required to grant some kind of consent to let the bank allow such access, such as checking a box on a terms-of-service screen in an online app. Third-party providers APIs can then use the customer's shared data (and data about the customer's financial counterparties). Uses might include comparing the customer's accounts and transaction history to a range of financial service options, aggregating data across participating financial institutions and customers to create marketing profiles, or making new transactions and account changes on the customer's behalf.
The Promise of Open Banking
Open banking is a driving force of innovation in the banking industry. By relying on networks instead of centralization, open banking can help financial services customers to securely share their financial data with other financial institutions. For example, open banking APIs can facilitate the sometimes onerous process of switching from using one bank's checking account service to another bank's. The API can also look at consumers' transaction data to identify the best financial products and services for them, such as a new savings account that would earn a higher interest rate than the current savings account or a different credit card with a lower interest rate.
Through the use of networked accounts, open banking could help lenders get a more accurate picture of a consumer's financial situation and risk level in order to offer more profitable loan terms. It could also help consumers get a more accurate picture of their own finances before taking on debt. An open banking app for customers who want to buy a home could automatically calculate what customers can afford based on all the information in their accounts, perhaps providing a more reliable picture than mortgage lending guidelines currently provide. Another app might help visually impaired customers better understand their finances through voice commands. Open banking can also help small businesses save time through online accounting and help fraud detection companies better monitor customer accounts and identify problems sooner.
Open banking will force large, established banks to be more competitive with smaller and newer banks, ideally resulting in lower costs, better technology, and better customer service. Established banks will have to do things in new ways that they are not currently set up to handle and spend money to adopt new technology. However, banks can take advantage of this new technology to strengthen customer relationships and customer retention by better helping customers to manage their finances instead of simply facilitating transactions.
Before banks offered open banking, the closest thing available were aggregation sites like Mint or Personal Capital that combine users' account information from all their financial institutions so they can see it in one place. Such services accomplish this by requiring users to hand over their usernames and passwords for each account, then scraping the data off the screens of those accounts. This practice has security risks and the results of screen scraping are not always entirely accurate, making it difficult at times for users to identify transactions. In addition, users may find that not all of their financial accounts are compatible with account aggregation services, preventing them from getting a true or complete picture of their finances. APIs are considered a more secure option because they enable applications to share data directly without sharing account credentials.
Risks of Open Banking
Open banking may offer benefits in the form of convenient access to financial data and services to consumers and streamlining some costs for financial institutions. However it also potentially poses severe risks to financial privacy and the security of consumers' finances, as well as resulting liabilities to financial institutions. Open banking APIs are not without security risks, such as the potential for a malicious third-party app to clean out a customer's account. This would be an extreme (and less likely) threat. Much broader concerns would simply be data breaches due to poor security, hacking, or insider threats that have become relatively widespread in the modern era, including at financial institutions, and will likely remain commonplace as more data becomes interconnected in more ways.
Open banking is likely to alter the competitive landscape of the financial services industry, which could benefit consumers by increasing competition as described above, but could also have the reverse effect and increase consumer costs if it leads to consolidation in financial services, due to the natural economies of scale from big data and network effects. Resulting market concentration and associate pricing power could more than offset any cost advantages to consumers. Such market consolidation has already been seen and widely criticized in other Internet-based services, such as online shopping, search engines, and social media, in that it is widely believed by consumers and regulators to result in misuse of customers' data by tech giants for their own benefit. Beyond the direct costs of market concentration, similar misuse of customers private financial data could ultimately raise even greater concerns.