You may have received a loan from a bank at some point to finance a large purchase such as a house, car, or boat. You probably also use your checking account for paying most of your monthly bills. Beyond these basic services offered by your bank, technology is creating more and more options when it comes to your banking activities. New technologies are transforming the way the banking industry operates by creating more efficient and cheaper financial services.
According to Forbes, open banking is somewhat of a revolution in the banking industry. With open banking, third-party providers (TPPs) are being allowed to use your banking information to help you save money, borrow more easily, and pay efficiently. In the UK, banks are required by law to cooperate with authorized TPPs; in the United States, some banks have begun to voluntarily make data available. While it is not legally required here, the trend of banks working with TPPs will likely grow. How will this industry shift impact you?
What is open banking?
When banking institutions share financial information electronically and securely with third-party providers, this is referred to as open banking. This information is shared only under certain conditions and situations that customers approve of. Think of apps on your phone that link with your bank account to help you round up a transaction to invest or save. These kinds of application interfaces gain access to your financial information almost seamlessly and efficiently with your bank’s cooperation.
Traditionally, banks secured and closely guarded all transaction and account data for their customers’ privacy and security. This information was some of the most secure personal information around. However, financial institutions and technology companies have acknowledged the advantages of opening data collection and sharing between other providers in the interest of their customers. This provides seamless and quick access to information.
Ideally, open banking will result in a better experience for consumers and more financial opportunities. Consumers are taking control of their financial information. You may already use services where open banking has improved. For example, third-party personal financial management tools use your bank account information to help you track spending and reach other goals. Open banking solutions are creating a new world of financial freedom where banking customers can use the power of their their financials to work for them.
Why can it be beneficial?
One of the growing most important assets in today’s world is data. Data harvesting and analysis is quickly topping one of the most the world’s most expensive industries. In this world, banking data is considered the cream of the crop, as it provides insight into how consumers and businesses are spending money, saving, and acquiring debt.
An average consumer today has several bank and credit accounts. Historically, if you wanted to get an overall picture of your finances, it took a lot of time to manually compile financial information from all accounts. With open banking solutions, third-party services can quickly acquire aggregate data from many financial institutions. This will let consumers analyze and digest their spending and earning habits and allow them to make better financial decisions. With open banking, financial services can use consumer data to offer more relevant credit card or savings account with better interest rates and advantages. Services such as applying and being approved for a loan can be almost instant with data sharing.
What are the risks?
The idea of consumers and businesses opening the doors of their personal data and sharing it runs counterintuitive to the ideas of the past decade about securing all online data. In general, the public has been wary of sharing their personal banking information, and for good reason. Given the multitude of cyber attacks on financial and banking data, it makes sense that consumers have been careful. As a result, consumer education is more important than ever with this new technology. Financial institutions participating in open banking will need to educate consumers about how data sharing will benefit them and how they can work together to keep the information safe.
The other issue with open banking is privacy. As banks open their doors to thirs party providers there is an increased risk of data being compromised or stolen. This can be troubling as banking data is extremely sensitive. When compared to previous methods of data collection, however, open banking provides significant safety measures to boost security. With open banking, passwords are usually not shared with third-party providers, and third-parties are subject to strict regulations.
Banking that used to be tedious and costly is changing thanks, in part, to open banking. Traditional banking has now shifted to offer better services, reduced fees, and easier processes. Open banking is changing the way we conduct business creating financial power and freedom for consumers.
