Banks share current account and transaction data with third-party companies through the use of open banking. Let’s see in detail what it is and why it is important for the banking and fintech world.
Open banking is a disruptive financial innovation that has revolutionized access to and management of banking services. It enables safe sharing of data between financial institutions and third parties, enhancing the customer experience and spurring innovation in the industry.
Let’s see briefly what it is and how it is redefining the financial landscape.
What is open banking: definition
Open banking is an innovative concept in the financial sector that is based on the use of open API to allow applications to access banking and financial data. This amplifies financial transparency for account holders through open data and private data, leveraging open-source technologies.
In practice, open banking involves the secure sharing of customers’ financial information with third parties (TPPs), allowing them to access them through open APIs. This encourages the development of new apps and services to improve the banking experience, leveraging data such as balance, expenses, and income.
This concept is made possible by PSD2, a 2015 European regulation that requires banks to open their APIs and data to third parties, with the consent of the customer. Open banking has radically transformed the financial sector, enabling the emergence of Fintech startups and spurring innovation in payments and investments.
In essence, open banking represents the application of open innovation to the banking world, which is redefining the relationship between banks, TPPs, and Fintech startups. PSD2, APIs, and innovative companies are the key drivers of this financial revolution.
How open banking works: practical uses
Open banking already has a large impact on everyday life, often without us being aware of it. For example, personal finance management tools use bank account information to track spending and achieve financial goals.
Thanks to open banking and PSD2, the banking sector will be increasingly competitive and diversified, with innovative services and low costs. Developers will be able to create customized apps that adapt to individual needs, improving the process of selecting the most suitable offers, such as in the case of a loan, where the app will use financial data to present us with the optimal offers.
In summary, the services enabled by open banking through the opening of APIs can mainly be divided into three categories:
- Account Information: allows access to current accounts through apps other than bank ones.
- Payment Initiation: allows you to initiate payments directly from your bank account via other apps.
- Fund Confirmation: Check if you have the necessary funds for a transaction.
In addition, many banking institutions have extended these features, offering extra APIs to PSD2, such as transfers between accounts, customer identification, instant insurance, and commercial details.
Advantages and disadvantages of open banking
By sharing personal financial data, open banking brings with it both advantages and disadvantages. On the one hand, it offers greater transparency and accessibility to financial information, enabling customers to more effectively manage their accounts and finances through a variety of innovative applications. This paves the way for personalized services, such as spending analysis tools and tailor-made offers.
On the other hand, open banking raises data security and privacy concerns. Sharing your financial information could increase your risk of fraud and personal data breaches. It is essential that banks and third parties implement stringent security measures, such as two-factor authentication, to protect sensitive data.
Furthermore, dependence on a large network of interconnections could make the system vulnerable to technical outages, jeopardizing the availability of financial services. Therefore, a robust and resilient infrastructure is essential to ensure business continuity.
In conclusion, open banking offers opportunities to improve financial experience but requires a balance between access to data and protection of personal data and security. Collaboration between the financial sector and regulators is crucial to fully realize the benefits of this evolution and address the associated challenges.
Original article published on Money.it Italy 2023-08-15 14:41:02. Original title: Open Banking: cos’è e come funziona
