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Open Banking refers to the banking practice of using application programming interfaces (APIs) to provide customer transactions, banking, and financial information to trusted third-party financial service providers. This allows financial service providers to analyze customer data and provide appropriate offers for products and services, such as financial products, bank accounts, credit cards, insurance, or payment services based on customer financial data.
The data shared with third-party financial institutions is pulled from various banks systems, credit unions, small businesses, and any other account information in the networked system. This data is shared with permission from account holders through their various terms and conditions agreements. Open banking was formulated as a mutually beneficial concept of providing insightful analytics to bankers and financial providers and more personalized recommendations to customers.
Because open banking intends to establish a fully realized picture of a consumer's financial life, pulling data from several banks and financial institutions is key. One common example of an open banking platform is budget planning apps that access consumer bank account and credit card information and present offers relevant to that consumer. Someone with a low amount in their bank account and several maxed-out credit cards would not be a good candidate for a high line of credit. However, they may be the ideal candidate for debt consolidation offerings. Someone who just bought a house may be interested in various home insurance and financing options, and less interested in high-risk stock offerings.
As this practice involves vulnerable consumer data, open banking regulation is in place. All third-party service providers must be pre-authorized by each financial institution with which they are requesting consumer data, as well as authorized by the government beforehand. Additionally, as stated above, each customer must give consent through their various banks.