What is Open Banking? – CNET

Keeping up with your finances in general requires managing many accounts across many different websites and apps. Verifying your accounts with multiple logins can be cumbersome. Aggregator sites like Mint or Personal Capital do a good job of simulating a public dashboard, but there are drawbacks to these tools. The reports produced by these tools are not 100% accurate and these third party tools require access to your personal financial information.

Enter open banking, a concept that has the potential to change the way we handle our finances.

What is Open Banking?

Open banking refers to a concept where banks and financial service providers have consensual access to your financial data and account information through application programming interfaces, or application programming interfaces. The API makes it easy to develop new financial products and services that can be accessed directly through your bank account, eliminating the need to open a new account or transfer funds between accounts.

The roots of open banking grew in Germany between the late 1990s and 2000s with the development of an open standard for communication between self-service customer banking machines. Created the first European Union Payment Services DirectivePSD1, or PSD1, a regulation to integrate financial payments across member countries.

Since then, adoption of open banking has taken off in parts of the European Union and Asia. However, Americans are less familiar with this new form of financing. Survey 2021 by GoCardless It found that 89% of Americans had never heard of open banks and had no knowledge of them.

Opportunities offered by Open Banking

Open banking has the potential to transform the financial services industry by increasing competition and offering customers more choice and control over their financial statements and decisions. New financial products and services can be designed to meet each person’s needs. This may include services such as opening a file High yield certificate of deposit in a new bank without having to download the bank’s mobile app, link your accounts to loyalty programs or share data with an accountant or financial advisor.

Another opportunity with open banking lies in the ability of the financial services industry to improve financial inclusion. This technology has the potential to reach disadvantaged populations including low-income individuals, those with poor credit or those living in rural communities.

Open banking tools are being developed to help previously unbanked individuals use data sharing and payment information to build a more accurate financial profile. People traditionally excluded from banking services can now meet eligibility requirements for such services as approval of an unsecured credit card.

What is the status of open banking in the US?

There are a number of ways in which opening banking is implemented in the financial services industry, including payments, lending, and personal financial management. Open banking enables the development of new payment methods and a platform that allows two separate entities to communicate and transfer money using identities and bank account numbers that are verified before transfers are allowed.

Open banking can also be used to improve the speed and accuracy of loan assessments by using a person’s data to better understand creditworthiness, rather than relying solely on a credit score. These personal finance tools use technology to allow customers to track and manage their finances more effectively by giving them a dashboard to connect to and see all of their financial accounts in one place.

Risks associated with open banking services

Open banking has the potential to positively impact the way we manage our finances. New technology by its very nature introduces a new level of risk. Protecting data privacy and eliminating unauthorized account access are among the main concerns of the wary public. Allowing third-party vendors to access your financial data increases the risk that our data will be misused or accessed by malicious actors. To avoid these risks, open banking systems will have to implement strong security measures such as strong encryption and secure APIs.

How does the open banking system work?

Open banking is a concept where your financial data is shared across multiple platforms using APIs instead of accessing your data and resources through centralized repositories like traditional financial institutions. APIs facilitate communication between third-party applications and, ideally, provide enhanced security through encryption and other security mechanisms.

Positives

• You can gain greater control over your financial data and be able to make more efficient decisions with more options.
• Companies will better understand your financial needs, allowing them to design financial solutions and services.
• Innovation by financial service providers will grow, leading to more competition and more financial products and services customized to meet your specific financial needs.

cons

• Potential risks of data breaches due to third party access to financial information.
• Unsolicited marketing requests where third party service providers adapt their own marketing strategies.
• The lack of regulation can create confusion in the criteria for how private companies can benefit from open banking technology.

What companies offer open banking services?

Many companies are taking the lead in adapting to the open banking space. Include some examples big banks Such as Wells Fargo, Bank of America, financial technology companies Robinhood and Chime, and tech giants Google and Apple. Launched Capital One DevExchange Which gives third-party vendors the ability to build tools that can integrate seamlessly with Capital One’s existing infrastructure. For example, a wedding registry app can communicate with a Capital One account allowing friends and family to contribute directly to the newlywed couple’s wedding planning account.

bottom line

Open banking has the potential to bring significant benefits to consumers while transforming the financial services industry. However, it also carries risks that must be managed. As open banking technology continues to evolve, adoption in the United States will undoubtedly expand to more financial platforms. The challenge is to ensure that systems are safe, transparent and fair for all involved.