Open banking is being used by more and more financial institutions. It is defined as a cooperative model to share banking data. Different parties use API (application programming interface) to share specific private data for better customer experience using different platforms and switching between them. End users get personalized offers and fast data sharing and business gets an opportunity to launch new products. Open banking application creates a win-win situation. Let’s find out and talk over usual and unusual open banking examples.
Open banking and data safety. Banks have traditionally viewed the personal data of their customers as a competitive advantage over competitors. The benefit of personal information management comes together with responsibility to take care of safety. It is always risky when talking about personal data. To prevent any data leak, all the necessary procedures must be implemented. If done right, it can significantly increase overall safety and detect any possible misbehavior. To learn about personal data protection rights, please visit FortifID.
Customer transparency and control. These qualities must remain its importance. Let‘s say the whole banking sector is based on customer transparency and control. Directives as PSD2 are advanced by regulators. Not all data categories require the same protection level. It goes without saying that most of us click „I Agree“ without reading or analyzing all the conditions and terms. That agreement without reading has become normal, and no one even has an understanding who we agree with. Terms and conditions are boring and scary, so no one wants to be confused and chooses the fast way. It would be great to present this information in a more engaging way.
Open banking has an implication for banks. Open banking brings new business models in financial services. Both providers and consumers can feel the advantages affected by open banking. The services simplify extension of credit, to identify customers and compare similar services from different providers. Sharing limited access data could help to advance financial inclusion tasks. Limited information helps to make better decisions on credit underwriting and accurate risk-scoring. Looking from the long-term perspective, by involving new consumers to the formal financial structure, open banking improves the market potential to provide profitable services.
PSD2 impact on open banking. The Payment Services Directive is established and controlled by the European Commission to regulate consumer rights across the European Union. The old directive was updated in 2015 to foster fin-tech innovation using open banking principles. The EU banking sector has improved and standardized general rules. This digitization has improved in payments and access to various information has created an environment for a new financial sector and fintech entrants. PSD2 is already increasing innovation, and these changes provide higher transparency, security, quality of service as well as reduced prices for customers.
The environment of competition. PSD2 requires all financial institutions to have access to their client’s payments information through a secure connection. That’s why Application Programming Interface is considered the most tested and reliable technology. According to this obligation, strict rules outline the liabilities and functions of Account Information Service Providers (AISP) and Payment Initiation Service Providers (PISP). This online service provides summarized information on several payment accounts, including transaction history and balances. Services like this could be provided by any approved organization: banks, Fin-Techs, retailers, telecom companies etc. PSD2 is a part of an increasingly integrated EU market. It comes along with the idea of free movement of services and goods between all the countries in the EU.
Open banking and Brexit. Brexit has raised a lot of questions, and one of them is: what about PSD2 when the UK becomes a non-EU member? The United Kingdom is closely related to many countries and financial institutions in the EU. The UK’s Financial Conduct Authority (FCA) has launched a Temporary Permissions Regime (TPR). This clause enables registered European financial institutions to continue operating in the United Kingdom without relicensing until 2024. Starting from 2022, UK Payment Initiation Service Providers (PISP) will have to provide additional information such as payer name and address for credit transfers and direct debits in euro between the UK and the EEA/EU. Brexit is an ongoing phenomenon, and no one knows how it will affect financial collaboration with the EU and other nations. The UK may take a leader’s role in Open Banking and then create another regulation for transactions and services within the UK and for other nations. Open banking’s potential is untapped, and this is a great opportunity to consolidate regulation related to voice or face recognition and other biometrics.
The biggest players compete to take a place in the market. All well-known platforms want to lead in the open banking sphere, so they could set their own rules and standards. This could be done by creating an easy-to-use platform with intuitive control and promoting it among prospective users, collaborating with suitable partners. Most of the open banking technologies are integrated to other platforms, so effective integration is really important. To attract more users and partners, lower transaction costs may be applied and other modern solutions to bring new customers.
Financial institutions face the question: collaborate with someone, build their own or buy open banking-based technology from others? First, it is beneficial to evaluate the current situation of the organization, advantages among others and future plans. No less important is to try to evaluate a competitor’s capacity, their pros and cons. When all of it is done, it is time to do the strategic planning.
Open banking is reaching fewer pitches, but it still has a potential to be developed further. Traditional banks were forced to change their nature of work and stop being closed to others. Regulation in this area is necessary, but it should be updated frequently because new technologies and of recognition are being used, and they are being improved very quickly. Regulators face a challenge to create an environment where fin-techs and traditional financial institutions could work with each other and collaborate for the best user experience. Sometimes it seems like innovation in the banking sector is always slow, but when we talk about funds and personal information, the most important thing is security, so testing and improving its functionality takes some time.
