Open banking has been billed by experts as a tool to revolutionize money management and finance. The potential for use of technology that is already in use in other sectors, such as Application Program Interfaces (APIs), in banking promises the delivery of a range of high-quality products and services, which could expound on those already existing within the market. By widening access to these products and improving the efficiency of their provision, open banking can create value for all stakeholders.
What is open banking?
Open banking may be defined as a financial system that seeks to provide users with a network of specific financial institutions’ data through the use of APIs. It has developed as a result of an increasingly competitive financial field, innovative action and supporting regulation such as the Payment Service Directive 2 (PSD2) in Europe and ‘Open Banking’ Remedy by the Competition and Market Authority (CMA).
The open banking initiative seeks to increase the competitiveness of the financial sector by driving innovation towards better quality products and services, facilitating an improved customer experience. It also seeks to address issues such as low customer switching rates, high charges on services, a general lack of product information for product comparison and complex pricing models. The initiative is designed to address the disparity between pricing and product quality, facilitating better accountability and market competition within the sector. In addition to this, open banking seeks to provide better consumer protection and data security.
Open banking requires players to openly share and make public information about their products, as well as customer satisfaction scores and other indicators of the quality of service. It also requires that these firms enable users to share transactional information with third parties online in a hassle-free process, as well as facilitate payments directly from their bank accounts without the use of credit or debit cards.
How does open banking work?
Open banking revolves around an improved banking experience for customers. It requires free access to detailed financial information, promotes innovative use of technology and facilitates better customer service. But how does it work?
Open banking relies on the use of innovative technology such as APIs to provide a better banking experience. APIs refer to technology that facilitates the secure and convenient exchange of data within organizations, which may not necessarily be banking institutions.
API-dependent services are already in use today. For instance, the popular taxi-hailing app Uber uses API technology to combine telephony, payments and Google maps into a single interface that enables a seamless transport experience. APIs facilitate the provision of innovative and convenient services that are bound to disrupt the market. Consider Uber’s disruption of transit services across the world and its influence on new developments in the industry.
What does open banking offer?
Open banking will offer new insight into money management for consumers and SMEs. Instituting open banking in Canada could have great potential benefits, some of which can already be observed from the impact of this modern development on sectors within which the model has been in operation. The use of APIs and other technology in conjunction with big data could improve the quality of financial insight provided to clients, allowing for better financial decision making. Instead of being forced to tabulate and input your data on different websites or engage physically with your financial service provider, you can take advantage of personal finance management tools that are facilitated by open banking. These platforms aggregate a variety of accounts on one platform, allowing users to monitor and manage their income, expenditure and other aspects of personal finance comfortably.
Moneyhub is a great example of an aggregator that takes advantage of open banking opportunities to provide this type of service. The platform brings to a single platform its users’ bank accounts, credit cards, investments, borrowing and savings, including additional financial details such as pensions and property owned. By providing insight into different aspects such as spending, it enables them to plan better for a secure financial future. Users on the platform can access professional financial guidance through a secure connection to an unbiased directory. It has also sought to secure data by providing a consent structure through which users are able to determine what type of data they wish to share on the platform.
The development of aggregators and open banking intermediaries such as price comparison tools has helped improve the level of access to better quality products. Better financial decision making, which is enabled by the presence of aggregators and transparency, could contribute to a better understanding of the products available. With users also able to compare products through the use of comparison websites, or even through a manual comparison of available products due to the increased accessibility of this type of information, they are able to access the best ones for their needs.
Due to better financial decision making, customers will be able to avoid potentially harmful products such as the high cost on bank overdrafts. You do not need to incur high costs during the repayment of an overdraft to your profit-oriented legacy bank. Instead, you may opt for automated lending services that could be friendlier priced.
One such innovation is SafetyNet Credit. This lending product will offer clients a certain credit limit should they find themselves going into an overdraft. Instead of paying hefty bank fees as a result of an overdraft, this open banking tool offers a cheap and secure alternative. Users can set threshold limits to their bank accounts, allowing an automated deposit from the lender in the event that their account balances fall below this point. You will then be able to make automated repayments on your overdraft as soon as your account balance surpasses the threshold point.
Open banking can be useful in addressing irresponsible lending and reduce debt collection efforts. If structured well, open banking can be used to prioritize payments to primary creditors over secondary options, allowing for a seamless payment process. It can revolutionize other aspects of payment as well, such as reducing the need for physical and plastic transactions. Instead of using a credit or debit card, open banking customers can take advantage of electronic payment models that are secure and very convenient to use.
Innovative brands such as Trustly are coming up with new ways to provide e-payment solutions to their users. Instead of carrying around their credit and debit cards with them, Trustly users can make a purchase for online goods and services without the need for these cards. It is free for use by consumers and works to expand the physical limitations to banking. For instance, thanks to this e-payment structure, users expand the scope of their payment structure. Instead of being limited to banking physically and within a single country, users are now able to bank across Europe with a single click!
Are there any risks?
The use of APIs, big data and other technological innovations carry the potential for great benefit, but they can also create a potential for harm. For starters, open banking is prone to a conflict of interest. In order to succeed, the structure needs to attract customers to the new services that are on offer. Customers might be reluctant to pursue these new services because they are used to accessing a number of services for free, even when the result is higher charges in other aspects such as overdraft fees. The only viable ways to monetize it is to exploit consumer tendencies and behavioral bias in order to sell more products or to receive kickbacks from larger players in the financial sector.
Commission based models have been proposed to address this, but they usually attract a lack of transparency. Commissions can create ancillary charging, product and provider bias, as well as hollowing out. Before taking up open banking in Canada, we can develop a better structure to ensure the full benefits of this enhanced banking are passed on to the consumers. The complexity of the market and the lack of sufficient information by customers could also be a cause for concern. Will customers understand the difference between the different products on offer? Will they be able to assess and independently determine the right products or will they be pushed to specific options by commission seeking third parties?
The threats that arise from the use of personal data make open banking an unsecured option for now. Many people still need to learn about different aspects of data, including optimization and utility, in order to better control it. While it is possible to achieve better data security by regulating third-party operators, the lack of an operational guideline might make this a little more challenging than expected. Regulating third parties is not a binary affair, meaning that it might be tough to institute consumer protection across the board.
Open banking is set to revolutionize the financial sector, thanks to its innovative approach that targets increased transparency and convenience for consumers. At Chango Inc., we are focused on shaping innovation through progressive development. We realize that open benefit can be a leading innovation for the financial sector. This is why we are already working on laying the groundwork to ensure that open banking overcomes the risk to provide comprehensive benefit for you. We are committed to ensuring that the future of open banking is realized today!