Open banking is a new technology that banks, building societies and other financial institutions use to securely share and exchange consumers' financial data.
Open banking can be implemented by a payment service provider into their checkout solution (using an Open API - application programming interface), to allow a merchant to request consent from a consumer, via their online bank account, so they can then share account level information or debit funds as part of an ecommerce transaction. It’s used for online transactions, but it’s also used as a way to bring better financial services’ products to consumers. We’ll explain more later.
At the moment, Open Banking has not been rolled out globally - but as it continues to grow in popularity, is becoming more widely available.
Is It Safe?
Yes, it’s perfectly safe and far more secure than traditional online payment methods. When it comes to purchasing goods or services online, rather than consumers having to key in their card details and other personal financial information, the merchant directs the consumer to their internet bank account to authorise a payment. The consumer then logs into their bank account via their bank app or website, approves the transaction and is redirected back to the merchant’s checkout page to complete the transaction flow. There’s no need to key -in any additional or sensitive information – and that’s a huge benefit in eliminating the possibility of fraudulent activity.
The name “Open Banking” doesn’t mean that your information is “open” for everyone involved in the transaction process to see.
Open Banking captures the following information:
- Account holder name.
- Type of account and currency.
- Account opening date.
- Transaction information.
To use Open Banking, consumers must consent. By consenting, Open Banking offers a wealth of other opportunities for people and businesses. See below for more.
More Access to Better Financial Services
Open Banking allows many non-banking businesses to provide extremely competitive and ground-breaking financial products and services (such as borrowing, investment and spending products) to consumers based on the collection of their data and user profile. This means that consumers have a wider choice from different service providers with products that are tailored to their needs. The end result is better financial decision-making and it’s easier for consumers to manage all of their financial products.
Another benefit of Open Banking is that there are more products being introduced into the market to respond to the demand for innovation.
Furthermore, consumers can also keep all of their financial activity in one, easily accessible place – usually a mobile app, reducing the need to visit several websites or apps – or even visiting their banks and building societies in person. In terms of consumers finding suitable financial products, information is specifically tailored as the data captured by Open Banking provides a way to match products and services by suitability. For example, if you wanted to switch your bank account, Open Banking will advise you on the best option. Or, if you want to invest in stocks and shares, Open Banking could tell you where to invest and how much etc.
For those providing financial services, Open Banking is boosting innovation in product offerings because the system has encouraged more competition in the market. Businesses also benefit because payments through Open Banking are automated, and this means improved efficiency.
Benefits of Open Banking In a Nutshell
- Better infrastructure for customers so transactions are faster and more secure.
- Improved borrowing/investing/saving products for customers.
- Less overdraft fees.
- Better customer service.
- More control over personal financial information.
- Convenient.
- Personalised to each customer and less costly to use.
- Helps customers make more informed financial decisions.
- Errors in payments can be easily rectified.
In Summary
With the speed of innovation in finance and technology change, Open Banking is the pathway to the future and is rapidly changing the way financial markets operate for businesses and for personal customers. There’s no doubt that there are enormous benefits with new financial products being introduced specifically tailored to customers’ needs.
