What is Open Banking? – Forbes Advisor | Techy Kings

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Open banking is well established in the EU and parts of the Asia-Pacific region but has been slower to catch on in the United States. Open banking has the potential to disrupt the way banks, businesses and consumers share and use financial data. So what is open banking, and why should you care?

What is Open Banking?

Open banking is the practice of securely sharing financial data between banks and third-party service providers, such as fintech applications. Before open banking was available, consumer financial data was controlled by big banks. Now, consumers can manage their financial information and access it across different platforms—receiving a more seamless and personalized experience in the process.

And by leveling the playing field for startups and technology platforms, open banking can spur innovation. It prompted the big banks to increase their offerings to compete for business with smaller, newer banks. This can benefit consumers, who often end up paying lower costs while enjoying improved technology and customer service.

Before you try open banking, you should know what kind of information you will be sharing:

  • Account Type
  • Name on account
  • Account opening date
  • Transactions, including how much you spent and where
  • Account balance
  • Payment details

How Does Open Banking Work?

Open banking uses application programming interfaces, or APIs, which are software intermediaries that allow two programs to communicate with each other. Despite the risks of using an open banking platform, APIs provide a measure of security when sharing your financial information.

Once the third-party provider receives data from your bank, it can use that information to offer you personalized solutions. For example, apps like Mint and You Need a Budget (YNAB) aggregate your data using open banking APIs, which you agree to when accepting the terms and conditions.

Here’s how open banking impacts different players in the financial services ecosystem.

  • Financial service providers: Open banking encourages innovation among banks and third-party service providers, leading to more choice for consumers.
  • business: Open banking data helps businesses understand their customers’ needs, allowing them to tailor their product and service offerings.
  • Users: Open banking gives users more control over their financial data and provides access to more efficient and personalized digital money management tools.

How to Apply for Open Banking

Open banking in the US is still in its infancy, but consumers may already be using open banking services without realizing it. Popular financial apps, including Robinhood and Chime, use open banking software.

And, some of the best budgeting apps, like Mint and Personal Capital, use open banking data to help users organize and manage their money in one place. Mint aggregates your banking data to track your spending and provide personalized budgeting recommendations. Without open banking, platforms like this would not exist or would only be offered by traditional banks.

Due to the lack of a regulatory framework and government initiatives to support open banking, US companies looking to implement this technology are largely on their own. Financial institutions interested in open banking can develop their own API. Alternatively, they may look to the company that provides the banking software they already use. Most leading banking software providers offer open banking solutions such as API portals.

Pros and Cons of Open Banking

Open banking has many benefits, but there are some potential problems as well.

Benefit

  • Innovation. Fintech startups and other developers gain access to consumer data through open banking, which spurs innovation in the financial services industry. This translates into more financial management tools for users.
  • The loan process is simplified. Easier movement of data between banks and fintech companies will pave the way for faster lending decisions. For example, providers can request your transaction and payment history via the open banking API.
  • Personalization. Consumers are more interested than ever in personalized digital tools that help them track spending, stick to budgets and reach their financial goals. With open banking, third-party apps can use your financial data to offer recommendations tailored to your situation.

Cons

  • Lack of regulation. The US has been slow to adopt open banking standards, but the Consumer Financial Protection Bureau (CFPB) will soon set rules for sharing consumer data.
  • Security concerns. Sharing your financial data online is not without risk. However, open banking security is taken seriously, and there are safeguards that we provide in the next section.

How Safe is Open Banking?

You may be concerned about the security risks of sharing financial information across platforms. But one key security feature of open banking is that you won’t share your banking credentials with third-party service providers. Instead, you will verify directly with your bank. In addition, financial institutions cannot share your information without your consent, which you can withdraw at any time.

Anyway

Ultimately, open banking enables banks and third-party service providers to offer a more personalized and streamlined experience to their customers. When it is widely enacted in the US, it will empower consumers to take control of their money and help them make more informed financial decisions.

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