What Is Open Banking (and How Will It Affect You)?
Your bank account holds your money, and you probably use your checking account for most payments. But technology increasingly creates options to maximize the value you get from your bank. With open banking, third-parties can help you save money, borrow easily, and pay painlessly.
In the U.K., regulations already require banks to cooperate with authorized third-parties. In the U.S., some banks voluntarily make data available, and that trend will likely continue (with or without it becoming a requirement).
What Is Open Banking?
Open banking is the practice of sharing financial information electronically, securely, and only under conditions that customers approve of. Application programming interfaces (APIs) allow third-parties to access financial information efficiently, which promotes the development of new apps and services. Ideally, open banking should result in a better experience for consumers.
You may already use services that open banking would improve on. For example, third-party personal financial management (PFM) tools like Mint use your bank account information to help you track spending and reach other goals.
No more screen scraping: The first generation of PFM apps, also known as account aggregators, required you to provide the same username and password you use to log in to your bank account. Then, the app would “screen scrape” the information it needed. But that’s cumbersome, unreliable, and requires re-working after your bank updates the website. APIs, on the other hand, give apps direct access to the exact pieces of data needed (your account balance, or specific transaction details, for example). What’s more, you don’t need to tell anybody your password.
What Can Open Banking Do for You?
Open banking efforts are a big deal for banks, regulators, and startups. But what about consumers? You should eventually have more options for managing your money, borrowing, and making payments.
Pressure on banks: While open banking allows third-parties to access bank information, banks themselves might decide to improve the services they offer. Instead of letting somebody else control the messages you receive, banks can compete with improved PFM tools and transparent, competitive pricing.
More helpful tools: Expect to see more third-party PFM tools. App developers will have an easier job with open APIs, allowing them to help you take control of your spending. With artificial intelligence, they may be able to predict events in your account or suggest products that may save you money. Of course, some apps might not recommend the best products and services—they’ll recommend the ones that pay referral or affiliate fees—so choose your tools wisely.
Streamlined lending: Getting a loan may become easier. Instead of manually gathering information from a variety of sources and submitting it to a potential lender, lenders can just grab what they need directly. Lenders may eventually have up-to-the-minute access to your checking and savings accounts, as well as the ability to download transactions for “alternative” lending decisions.
Business loans: When your company needs to get a loan or draw on a line of credit, lenders may want to review your books. Again, instead of submitting reports (which could be inaccurate by the time lenders see them), lenders can pull all the data they need from your bank, credit card issuer, and accounting system.
Automated accounting: Businesses and consumers may also benefit from easier and less expensive bookkeeping. Integrated systems can automatically update when you send or receive payments, and you may enjoy a reduction in manual tax-preparation tasks.
Fight fraud and waste: Banks and third-party apps can already scan through transactions. With artificial intelligence and crowdsourced information, they can highlight monthly charges that you might not really need. But with open banking standards, it’s easier to use that information, and you get visibility into more accounts.
New ways to pay (and accept payments): Payments are a significant piece of European open banking regulation. Under the European Commission's Second Payment Services Directive (PSD2), banks must allow third-parties to initiate payments on your behalf. Again, this isn’t necessarily new (Venmo and PayPal are both non-bank products that you’ve probably used), but it will get easier for additional service providers to handle payments. Businesses may also benefit through reduced payment processing costs.
Innovative services: We don’t yet know exactly how open banking will change financial services. Ideally, innovative startups will bring newer, better ways of doing things to the marketplace, and consumers will come out ahead. Of course, time will tell.
What About Privacy?
Open banking relies on sharing data, but you might prefer to keep your information private. Fortunately, open banking should not automatically reduce security or privacy. Third-parties, banks, and APIs would all use robust security measures to encrypt and protect confidential information.
Permission required? Open banking initiatives typically specify when and how financial institutions can share your data. For example, U.K. regulators require customers to approve of information-sharing with specific parties. U.S. banks already control (and limit) how your information is shared, and they don’t seem eager to give up that monopoly. But Facebook and others have asked banks to share your data, and those types of relationships would get easier under open banking.
Who has your data? Any sharing you authorize puts your information into somebody else’s hands. Then you need to wonder how effective that third-party will be at protecting your information, and what they’ll do with the data. Open banking promises to let you make payments through social networks and let startups analyze your spending—but that might not be what you want.