What Is Open Banking?

The past decade has seen a host of ‘open’ initiatives like open innovation, open-source software, and open government. What’s up next? Open Banking is definitely one interesting area that is set for explosive growth and disruption in the way financial services are provided to the end-users.

But, what is Open banking? What are its implications for the users, banks, fintech, and the broad financial ecosystem?

Open banking is the use of Open APIs to enable TPPs (Third Party Providers) to build applications and services for the end consumer by leveraging consent-based consumer data from data providers (Banks, Telecom providers, etc.)

I will be covering the following points in this blog-

  • How open banking functions and differs from the current processes
  • Open banking implications for consumers and financial institutions

Leveraging data allows the creation of innovative products and thus a better experience for users. People must therefore be able to own their data and share it with TPPs (Third-party providers) of their choice to get the best services customized to their needs.

Currently, when data is shared the customer has little or no visibility into how the data is being used. In order to access services like account aggregation (single view of multiple bank accounts), users have to share their authentication credentials with TPPs. In turn, the TPP uses methods like screen-scraping to programmatically extract information from bank websites and applications.

Screen scraping schematic diagram

Problems with current practices like screen scraping-

  1. Login information is shared with the TPP. This creates a financial risk for the users as well as the financial institutions (Banks)
  2. The user has no control over what data is being downloaded by the TPP. Screen scrapers can get a lot more information than they actually need. (Ex- The whole HTML page will be downloaded even if only one line item is required)
  3. A small change in the bank’s website can break the screen scraper algorithm. Thus, data is not obtained until the screen scraper adapts. This leads to a bad customer experience more often than not

How Open banking solves these problems?

As the definition suggests, Open banking relies on APIs to get relevant data based on the customer’s consent. Customers are not only able to control what data is shared with TPPs but they can also grant or revoke access any time!

Simply put, API or Application programming interface is a software intermediary that allows two applications to talk to each other. It is a set of programming code that enables data transmission between one software product and another.

Open Banking Schematic

TPPs use open APIs to get consent-based customer data from financial institutions like banks, insurance providers, and tax platforms to provide services to the customers.

These APIs are standardized and the open banking flow takes place on basis of frameworks designed by regulators or standard bodies. For example, India is implementing the Account Aggregator Framework under DEPA (Data Empowerment and Protection Architecture).

Account Aggregator Framework (DEPA, India)

An Account Aggregator provides data to a Customer or Financial Information User (FIU) from a Financial Information Provider (FIP) based on the user’s explicit Electronic/Digital Consent. These AAs allow users to access and link different financial accounts (Bank account, Trading account, Tax profiles, or Insurance accounts).

The following image will give a clearer idea of how an Account Aggregator/ consent manager works:

Account Aggregator (Consent Manager) in action

Open banking is a positive-sum game for both financial institutions as well as the end consumers. While improving the experience for end-consumers, open banking will reduce the risks for banks/FIs by bringing a stop to non-secure practices like screen scraping

Open banking advantages for end-consumers and FIs

Open banking is gaining momentum around the world. Countries around the world have different approaches but the same end goal- securely sharing customer data to TPPs via APIs.

Global Approach to Open Banking

We have a long way to go when it comes to global open banking standards. Some countries like Australia have significant government oversight with laws like CDR(Consumer Data Rights), while other countries might have either a regulation encouraged (Ex- India, Hong Kong, etc.)or a completely market-driven (Ex-United States) approach towards open banking.

To sum up, open banking is revolutionizing the customer experience while giving individuals more control over how their personal data is used and shared. In the next blog, I will cover use cases and innovative open banking applications being implemented globally!

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