Open banking is a structure through which your trusted personal finance apps can access banking data. It allows you to have a more accurate view of your finances, and to compare, analyse and manage accounts more effectively in order to make better financial decisions.
The open banking platform allows banks to enrich their own customer ecosystem and presents new opportunities for third party businesses.
To provide these opportunities, a bank needs to securely share customer data with third-party companies or apps through the use of open application programming interface platforms (APIs).
Before open banking APIs, online banking was rife with security flaws: users would give apps their banking login details directly, leaving their information vulnerable to hackers.
With open banking, the third-party provider accesses a user’s bank information with a token, allowing the bank to be the gatekeeper of the information - so that the app doesn’t need to store any of the information. Whilst the exact technical protocols are still to be agreed, it’s a process that’s intended to work seamlessly.
The brand new Second Payment Services Directive (PSD2) is the EU regulation accelerating the progress of open banking in Europe. It requires banks to open up their accounts for access by two new types of payment service providers: account aggregators and payment initiators.
Account aggregators allow customers to access, for example, a website or app where they can see at a glance the balances for each of their accounts (their current account, savings, cards, etc.) even if they are offered by different banks.
Payment initiators go one step further and allow the third party to make a payment from the account on the customer’s behalf.
While one aim of the legislation is to regulate these businesses, by requiring all payment account providers to make their online accounts accessible, PSD2 is seen as an enabler of innovation and a way for new services to emerge.
Following PSD2, the UK Competition and Markets Authority (CMA) requires the largest UK banks to make personal and business current account data available to third parties, if requested to do so by their customers, through open banking APIs.
The landscape of banking is changing. We’re seeing banks become platforms on top of which third-party companies can build their own applications using the bank’s data.
In the future of open banking, accelerated by these regulations, fintech companies can construct new services that unbundle traditional closed-loop bank products and services, bringing them to the consumer base directly. This will better enable them to construct these solutions independently of banks, but actually could also make the banks more receptive to a potential partnership.
The time to mobilise APIs is now.
In the current financial services landscape, fintech is most commonly associated with the payments market, particularly around digital wallets and peer-to-peer payments. PayPal was one of the earliest companies to simplify the online payment process through the use of APIs, with more recent examples being Venmo, Google Wallet and Apple Pay.
However, a growing number of entrants to the field are beginning to challenge various aspects of the bank’s business models. Dopay are even offering an alternative to bank accounts. Some other initiatives proving to be successful include:
Whilst banks are opening their doors, entrepreneurs will be looking to leverage the opportunity to use the bank as a platform for new consumer services, in existing and future business, by building platforms to integrate with open banking APIs.