In the U.K., regulations already require banks to cooperate with authorized TPPs. In the U.S., some banks voluntarily make data available, and that trend will likely continue, with or without it becoming a requirement.
Open Banking Definition
Open banking is the practice of sharing financial information electronically, securely, and only under conditions that customers approve of. Application programming interfaces (APIs) allow TPPs to access financial information efficiently. This promotes the development of new apps and services and lets them be developed quickly and cheaply. Ideally, open banking should result in a better experience for consumers, as well as more sophisticated financial services or any program with embedded financial services. You may already have used services that open banking would improve upon. For example, third-party personal financial management (PFM) tools like Mint use your bank account information to help you track spending and reach other goals. Or you might have already connected your bank account with an investment app or other subscription-based app using Plaid.
No More Screen Scraping
The first generation of PFM apps, also known as account aggregators, required you to provide the same user name and password you use to log in to your bank account. Then the app would be free to “screen scrape”—to pick and choose the information it needed from among all the info it had at its disposal. That was cumbersome and unreliable and required reworking after your bank updated its website. APIs, on the other hand, give apps direct access to the exact pieces of data needed: your account balance or specific transaction details, for example. What’s more, you don’t need to tell anybody your password.
What Open Banking Can Do for You
Open banking efforts are a big deal for banks, regulators, and TPPs. And consumers should eventually have more options for managing their money, borrowing, and making payments.
Pressure on Banks
While open banking allows TPPs to access bank information, banks themselves might decide to improve the services they offer. Instead of letting somebody else control the messages you receive, banks can compete with improved PFM tools and transparent, competitive pricing.
More Helpful Tools
Expect to see more third-party PFM tools. App developers will have an easier job with open APIs, allowing them to help you take control of your spending. With artificial intelligence, they may be able to predict events in your account or suggest products that may save you money. Of course, some apps might not recommend the best products and services—they might recommend the ones that pay referral or affiliate fees instead—so you should choose your tools wisely.
Streamlined Lending
Getting or refinancing a loan may become easier. Instead of manually gathering information from a variety of sources and submitting it to a potential lender, consumers can permit lenders to just grab what they need directly and make them a better offer.
Business Loans
When your small company needs to get a loan or draw on a line of credit, lenders may want to review your books. Again, instead of your submitting reports that could be inaccurate by the time lenders see them, lenders can pull all the data they need from your bank and accounting system.
Automated Accounting
Businesses and consumers may also benefit from easier and less expensive accounting processes. Integrated systems can automatically update when you send or receive payments, and you may enjoy a reduction in manual tax-preparation tasks.
New Payment Methods
Payments are a significant piece of European open banking regulation. Under the European Commission’s Second Payment Services Directive (PSD2), banks must allow third-parties to initiate payments on your behalf. Again, this isn’t necessarily new (Venmo and PayPal are both non-bank products that you have probably used), but it will get easier for additional service providers to handle payments. Businesses may also benefit through reduced payment processing costs.
Privacy Issues
Open banking relies on sharing data, but you might prefer to keep your information private. Fortunately, open banking should not automatically reduce security or privacy. TPPs and banks would need to take steps to protect confidential information and to educate consumers about the new risks they face.
Data Sharing
Open banking initiatives typically specify when and how financial institutions can share your data. For example, U.K. regulators require customers to approve of information-sharing with specific parties. U.S. banks already control (and limit) how your information is shared, with input from you, and they don’t seem eager to give up that ability. Any sharing you authorize puts your information into somebody else’s hands. Then you need to wonder how effective that TPP will be at protecting your information—and what they’ll do with the data.
