Encyclopedia

Open banking

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What is open banking?

Open banking is a banking model that allows third-party financial service providers to access customer financial data through APIs, promoting competition and innovative financial products. The third-party providers could include fintechs, merchants, or currency exchanges, for example.

In Europe, industry regulations such as the Second Payment Services Directive (PSD2), help to drive the open banking concept by stipulating that banks need to cooperate with 3rd party providers in the open banking ecosystem.

Examples of how providers use open banking technology include instant EFT services, bill payment services, rewards programs, and affordability checks.

How does open banking work?

Open banking allows financial services companies and other third parties to securely share and collaborate on customer data by using APIs. The model essentially decentralizes financial services.

Traditionally, banks have kept data in silos. But with open banking, data is shared with third parties using secure communication protocols and standardized data formats.

Is open banking safe?

Open banking was designed with safety in mind. The process uses bank-level security, based on the Financial Grade API specifications. Regulatory procedures also guide how data is shared in open banking. For instance, in Europe, providers must register with the Financial Conduct Authority (FCA), their national regulatory agency, in order to provide open banking services. In the U.S., providers must abide by the standards agreed on by the Financial Data Exchange. In addition, customers have control over what data they share and who they want to share it with.

What are the benefits of open banking and why is it the future of fintech?

This new approach to banking adds more convenience and personalization for banking customers. For financial institutions, it can improve their decision-making as they have access to more data points from the broader industry. For instance, collaborating on how to fight a new type of fraud like instant payments fraud.

An open banking approach can boost innovation and competition. It reduces the barriers to entry for fintechs and other businesses so they can develop more affordable alternatives to traditional banking services.

For consumers, the benefits include better, more personalized products and improvements in the customer experience.

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Keywords:

Open banking | Application Programming Interface (API) | PSD2
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