Digital Themes

Open Banking

What is Open Banking?

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.

What are the benefits of Open Banking?

  • For the consumer: Consumers will enjoy a more personalized experience, with recommendations based on what they may most benefit from (e.g. student loans over motorcycle loans), Additionally, having more visibility into where they spend the most money and how their investments are doing can aid in making more informed decisions on future purchases or loans. Further, easy access to all accounts in one platform simplifies payment methods and payments across accounts. Finally, open banking as a concept creates more competition with financial institutions and service providers, which translates to them working harder to get or maintain a consumer's business.

  • For the banks and financial institutions: Visibility and transparency into other banks' offers and services incentivize creativity and novelty. Banks will capitalize on the increased competition and use it as motivation to create innovative banking solutions for their customers.

  • For third-party service providers: One example is insurance companies that can see the large purchases a consumer is making (i.e. a car or home). They can then preemptively begin offering policies to insure those big purchases.
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