Financial decisions are some of the most important decisions we make in our lives. They’re also the most stressful, with new research finding that young people have experienced significant increases in financial stress levels this year.
But, thanks to new technology, understanding what your options are and what your financial future could look like are now all possible with open banking that give consumers greater power over their finances.
How does open banking work?
Quite apart from just clicking the “Accept” button on terms and conditions, open banking principles give control of financial information back to the customer by sharing that information with trusted third parties that utilise that information to create better offerings for their clientele.
According to Basiq, it aims to make it easier for customers and financial institutions to share information. Third parties like technology startups or online financial services like Square also use open banking information to offer new services to their client.
The key principles
Open banking is defined as a banking system where information is shared between the financial institution and various third parties with the expressed consent of the account holder through application programming interfaces.
There are several key principles of open banking. These include: developing secure banking application processing interfaces that allow customers to share their information confidently. Another principle known as “Policies of Consent” is at the core of open banking. As such, information is heavily protected within a legal and technological framework that protects customer information, despite openly sharing it with third parties.
The last key principle of open banking is the real-time sharing of information and real-time initiation of payments via third parties.
Collaboration between financial institutions and third-party providers
Open banking’s application programming interfaces allow third-party providers to have secure access to the financial information of an open bank’s customer base. This relationship between specific financial institutions and third-party providers has grown dramatically in the last several years, with 50 per cent of American financial institutions considering themselves “open banks.”
Also Read: Why is open banking the future of fintech?
By allowing access to customer financial information by third-party providers, open banking enables both the banks and the third parties to offer their customers different services based on their customer’s behaviour, based on aggregate data collected.
Open banking allows customers to pay for things with a click or swipe by using third-party applications like PayPal, Wise, Amazon, or Google Pay — no longer need to log into your bank to send an e-transfer.
Open banking principles encourage customers to pay for things using third-party applications and provide benefits such as additional securities on transactions, as well as a percentage of funds sent being paid to a third party, such as PayPal.
Advantages of open banking for consumers
While open banking provides consumers with cause for concern, given that their information is being shared with third parties, this isn’t necessarily so well-founded because of the degree of sophistication involved in the technology that allows sharing.
Reducing cost to consumers at the point of sale
A great benefit to consumers using open banking is the cost reduction at the point of sale. To accept credit card payments, businesses must incur a one to four per cent cost taken by the credit card company to use its sales terminal and platform. These are often passed directly to the consumer. By using open banking, consumers no longer incur such fees.
Rights to control financial information lies with the consumer
As more than 50 per cent of American banks were open as of late 2022, the scales are shifting in the open banking direction. More open banks with greater information-sharing capabilities ultimately mean better services for banking customers.
The Consumer Financial Protection Bureau (CFPB) is ensuring a more competitive marketplace for consumers by utilising a law passed by the US Congress in 2010 that gives individuals the ultimate right over their personal financial information.
Greater access to new services
Consumers can access services like budgeting applications, investment platforms, and loan comparison services using open banking principles and APIs. Connecting your bank account directly to your budgeting app helps you create a more accurate budget faster, as apps like these automatically input your updated financial information. Your budget is always available at a glance on your phone, helping you make better financial decisions.
Changing legislation increases collaboration
As 2023 ticks on, the changing financial landscape of the world is forcing financial technology, including open banks, to collaborate with traditional banks. In 2019, partnerships between traditional and open banks were just 49 per cent. However, this jumped to 89 per cent in 2022, primarily due to the realisation of traditional banks that open banks aren’t necessarily an adversary.
Also Read: E-commerce for the future: How open banking enables greater security and trust
The introduction of new laws in 2024 by the CFPB will require traditional banks to share financial information with consumers as an attempt by the CFPB to promote consumer choice of which financial institution they invest in and make it easier for consumers to switch financial institutions without starting from scratch.
The future of open banking
As artificial intelligence continues to grow in our everyday lives, it’s no surprise that the banking industry will also adopt artificial intelligence. In open banking, artificial intelligence programs such as “risk classifiers” take financial data like paycheque amounts and fixed outgoing expenses and give customers an AI-analysed catalogue of optimal payment dates for other necessary bills based on their pay schedule.
Another role that artificial intelligence takes on within the financial industry is making investment predictions and analysing financial health based on currently-available financial data. This data is no longer only gleaned from their bank account but from information shared across different fin-tech platforms.
By using AI and machine learning, banks and open banks can give customers a better picture of their financial health information; AI is predicted to increase its capabilities into the latter half of 2023 and beyond.
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