What Is Open Banking?
The definition of open banking varies slightly from country to country, but it generally refers to using open APIs to share data between financial institutions and third-party fintech developers. In this way, open banking allows for an unprecedented level of experimentation in product development across the financial services industry. It also allows consumers to have access to and control of their own data, empowering people to more securely aggregate all their accounts in one place.
Benefits for Consumers
To understand the benefits of open banking, consider your own financial life as a consumer. You likely have a combination of credit cards, debit cards, insurance products, retirement accounts, and more — all with multiple financial institutions and fintech companies. There’s a lot going on. Open banking makes it easier to securely enjoy a single view of your accounts and even make direct payments from these accounts.
Open banking also lets you choose services from a wide competitive set and easily try out new financial products. You can link bank accounts to loyalty programs, share data with accountants and advisors, speed up the loan process by automatically and safely transferring data into application forms, and more.
Benefits for Financial Services Companies
Open banking brings enormous benefits to financial institutions and fintech companies. Why? Because customer-permissioned data sharing via open banking is bi-directional, meaning that financial institutions and fintech companies receive data from the sources they connect with via API. This sets them up to use that data in creative ways to best serve their customers.
Open banking tears down data silos by providing financial services companies with insights into held-away accounts and enabling data sharing across departments. It also helps create a unified approach to digital identity management and reduces data resale and data exhaust issues.
Finally, open banking brings added security by replacing sharing credentials (such as username and password) with anonymized, single-use digital tokens. This means that bad actors can’t access the personal information of end users during a transaction. Tokens de-identify user data, greatly increasing the chances that personal data will not be subject to risk.
With open banking, customers must give consent and permissions before their data is shared. These permissions are set on a case-by-case basis by the customer, so each customer chooses what they do and don’t want people to see. For example, customers setting up a budgeting app can grant permission to share a particular subset of data rather than share everything.
Benefits for Nations
In addition to enjoying the benefits of individual flexibility and added security, open banking brings innovation at the national level. As nations roll out open banking and as consumers share their data, savings rates, deposit rates, loan rates will increase. After all, if a lender is able to see a 360-degree view of a user’s financial life, the lender’s algorithm will more confidently pinpoint whether that user is credit worthy. In light of this, default rates will decline and healthy lending will go up, making the entire financial system across the nation a better oiled machine. As this success feeds into itself —coupled with citizens who have complete insight into their financial life — nations that leverage open banking will have the advantage in innovation and collaboration over those that don’t.
Given all these benefits, it’s no surprise that financial services companies, including Visa and Mastercard, are developing open banking projects. For instance, Visa’s open banking initiatives consist of becoming a network for fintech companies and merchants.
Other leading companies in this space are also experimenting with open banking in their own way. Here are three examples.
Example: BBVA Open Platform
BBVA Open Platform offers APIs that help financial services companies verify identification, move money, originate accounts, issue cards, receive notifications, and more. For instance, if a fintech company is looking for a simple way to identify the customers they add to their platform, they can connect with the BBVA Open Platform API, which searches public and private databases, social media posts, watch lists, and sanctions —all in one API call. In this way, fintech companies don’t have to build this process from scratch. Companies such as Digit, Xero, and Wise are already making use of BBVA Open Platform. BBVA is setting the stage for big moves in open banking.
Example: Capital One’s DevExchange
Capital One launched DevExchange with the motto, “Use our stuff to build your stuff.” Like BBVA, they offer the ability to verify identity and move money via API calls. They also let third parties connect customers with a view of their Capital One accounts and transactions via tokens rather than credentials. In addition, they give third parties the ability to create accounts with Capital One directly within these third-party products. Use cases include integrating wedding registries with a Capital One account and opening a savings account directly within a money management app.
Example: Citi’s Developer Hub
Citi’s Developer Hub enables developers from various digital companies to connect to Citi via API. Notably, Intuit uses this connection to authorize data sharing with Quickbooks and Mint, Quantas uses it for their credit card offerings, and SingSaver uses it for instant account verification with Citi cards. The offerings in the develop hub vary by country, but Citi allows account aggregation, access to transaction data, authorization, and reward information in many places. By creating this developer hub, Citi is positioning itself for flexibility and stronger connections for their customers who use third-party apps.
Build for the Future
If you want to be a leader when it comes to open banking, the time is now. Many companies are already making waves on this front, and you can be one of them. When you do, you’ll enjoy the benefits listed above and be ready for the future of banking.
Want to take a deep dive into the world of open banking? Check out the Ultimate Guide to Open Banking. It includes suggestions about how to get started as well as original data points you should consider as you build out an open banking strategy. Download it for free today.