Open banking or “open banking data” is a special practice of working with government financial institutions, in which access to banking information is provided to third parties-providers of various financial services. Most often, implemented through API applications. There is an opportunity to create a common network, in which representatives of banks, users, and representatives of other institutions will be involved, with the help of which it is possible to significantly improve the quality of work with information about income, expenses and distribution of funds. At the current moment, this is the main source of innovation related to traditional banking.
What is the point?
Banks provide access and control over personal and bank data of their customers to third-party service providers. Usually, to various financial and technological startups. Clients, of course, are aware of this and can refuse, by discussing the situation during the execution of the contract, or without putting a “tick” in front of the corresponding column in the mobile application.
If such an agreement is signed, then a third party will be able to use customer data to more efficiently generate and compare accounts, analyze spending, create marketing profiles and exchange accumulated data with other financial institutions.
Most applications that provide open banking operate on the principle of decentralized networks. With all the advantages and possible disadvantages.
The most obvious is that open banking APIs make it much easier to switch between settlement accounts of different banks. In addition, due to the openness inherent in decentralized applications, users have the opportunity to choose the best services on a competitive basis. For example, savings account with the best rate. Or a loan on more favourable terms.
There is a benefit for the other side too. Lenders get a more accurate picture of the financial transactions of potential customers, so they can more effectively calculate the possible risks and offer more profitable contracts. And users, in turn, will get a clear understanding of their picture of income and expenses. This is necessary in order to understand whether they will have the opportunity to repay a loan under such conditions or not. This also applies to such a complex market segment as mortgage lending. Already there are applications that can, based on an analysis of customer accounts, calculate which mortgage terms they can handle without many limitations of their own capabilities.
There are also applications that allow you to optimize the financial accounting of small enterprises by changing accounting into online mode.
Open banking allows you to create full competition in resolving financial issues. If before its existence, people had to completely rely on the professionalism of bank employees and their own analysis, now automation and professionals will analyze the situation and find more effective solutions. Large players in the financial market will be forced to take steps towards the consumer in order to maintain their clientele.
Before the introduction of open banking, one of the few ways to combine information about your accounts, expenses and income was aggregator sites such as Mint or Personal Capital. They did a good job of their tasks, but they weren’t very reliable in security matters. The fact is that the user had to provide these sites access to their accounts, and not just the data that is stored there. And this significantly increases the risk of leakage. And not all financial accounts were compatible with aggregator software. APIs in this sutuations is much more reliable and safer.
The risks of this situation are also obvious - the more people and organizations own some kind of data, the higher the chance of leakage of this same data. And the API applications themselves are vulnerable to hacking. Yes, the chance that all this will allow you to manipulate the user's money is not too great, but it, unfortunately, remains.
In addition, there is a chance of third-party user data abuse. And since decentralized applications rarely have a specific leadership, it will be quite difficult to hold someone accountable when such an unpleasant situation does happen.
Open banking is a fairly successful attempt by the traditional financial system to meet the latest changes in society. An attempt to introduce elements that are typical for interaction with cryptocurrencies into traditional financial transactions. And we can assume that in the future more and more large banks will gradually switch to this way of working with data. In addition, normal competition in the financial sector will finally begin. However, some experts fear that this could lead to market consolidation and more stringent pricing, and then complete monopoly. However, in general, forecasts regarding the development of open banking are positive.