This guide is open banking explained 101. Open banking is something that has been officially legislated in the European Union since January 13, 2018. Because open banking deals with personal information and private data, it requires a very high level of security for all involved parties. The open banking impact on our daily lives and business practices is widespread. In this article we will cover open banking basics from A to Z. So, let’s begin Open Banking Explained!
What is open banking – simple overview
Open banking is a concept, based on open API technology. It’s a solution that enables third-party service providers to open up their bank accounts’ data to other parties rather than the bank itself. This can be done in order to:
- Make payments
- Send data for verification (income, financial health, etc.)
- Track spending
- Get offers for a loan
- Evaluate insurance deals
And so much more.
The key to all of this openness is consent and authorization. All of that lies in the hands of the customer. So, he or she can freely decide whether they want to share their personal data with a third party in exchange for the service. If the customer decides to not share data, they can do that. If they decide to share it, they can easily reap the rewards.
Open banking API – how do they work?
An open API for a bank is an application program interface that connects a third-party service via the bank. If we simplify things, we can see it as a way of enabling the process of accessing relevant data in a specific environment. The API is restricted to gathering and aggregating data only to which it’s given consent to.
Let’s analyze the process of open banking through an example:
The open banking process for consumers (in this case, Bob)
Bob logs into his utility bill management service where he pays all utilities on his apartment. He proceeds to pay and instead of paying every single supplier/company individually, he just makes a single payment to the management company. The company has an integrated API that allows paying from any major bank with a few clicks. Bob agrees and authorizes his consent to send money via the API. The service then distributes the money to utility companies. It’s all safe and secure.
The API only instructs the bank to make a specific transfer to a designated account. All information is visible to the customer before he or she approves of the payment.
Areas where open banking can be used
Besides just making payments, as we mentioned, open banking is implemented in any possibility that requires the use of open APIs. It’s used not just to collect money for services, but to open up customer information and data. The possibilities for that are endless.
One of the most prominent uses with the highest upside is tenant verification and loaning. When open banking is used in granting loans or checking to see various offers from banks in one place. This allows banks and credit unions to automate loaning as much as possible with automated and autonomous verification granting almost 100% risk-free loaning with only the most unique cases going for manual verification to the human agent.
In short, wherever you might need to verify your financial health or income, open banking is the most direct and obvious way to do it. Save time by avoiding paper documents and do things digitally in just a minute or two. Open banking should allow anyone the access to better and more customer-oriented financial services right away.