Open banking, a system that allows third-party financial service providers to access bank account information and transaction data, is transforming the banking industry. This system can give a consumer more control over their money and the way they move, manage, and make it. Consumers have the right to give access to these third-party financial services. Access is granted when the individual’s bank or financial organisation transfers their data to regulated third-party providers.
Open banking is heavily regulated, and access is granted using application programming interfaces (APIs). These APIs are programmable codes that act as the ‘middleman,’ connecting one software platform to another. Of course, there are other security measures in place, such as two-step verification processes and the use of artificial intelligence (AI).
The concept behind open banking started when the UK government investigated the supply of retail banking services and found that there was a need to improve competition in retail banking and financial services. Open banking has improved the way that clients are able to control their finances. Similarly, businesses have better opportunities to implement different innovative services.
For example, apps such as TaxiApps utilise opening banking to access users’ bank details to pay for cab fares.
Anyone can opt into open banking services, including individuals and businesses. The UK’s largest retail banks and building societies, such as Barclays plc, Lloyds Banking Group plc, Santander, Danske, HSBC, RBS, BoI, Nationwide and AIBG, are legally obligated to share certain information online through open banking.
As with any financial decision, for all the benefits a system can offer there are likely to be some areas for consideration. For personal customers, here are some of the areas that one should take into account before agreeing to an open banking system:
As open banking has given the consumer more power and options in managing their finances, there are a multitude of advantages to using open banking. The biggest advantage is that the consumer now has a stronger ability to manage their finances through tailored products and services. Customers will also benefit from the debt management tools offered through open banking, such as overdraft alerts and recommendations to help them choose between interest rates. Some of the advantages for personal customers also include the following:
While open banking provides several benefits to personal customers, there are also potential drawbacks to consider. Some of the disadvantages for personal customers include the following:
In the rapidly evolving world of open banking, understanding the advantages and disadvantages for businesses is crucial in order to fully leverage the opportunities it presents and mitigate potential risks. Here are some factors to consider:
Open banking also benefits business owners. For example, there are often unwanted credit card fees for merchants that use a card processing service. As a result, this inflates the cost of goods and services for the consumer. However, with open banking, a business will have more options when choosing card payments and can potentially eliminate these fees altogether. Here are some other benefits of open banking for businesses:
Though open banking offers numerous advantages for businesses, there are also potential challenges that need to be considered: