Open Banking: Advantages and Disadvantages

The financial industry has evolved. Regarding all business and market sectors, including communications, entertainment, sports, and art, technology has advanced significantly. These innovations have not rendered obsolete the financial system, which has for some time now had to adjust to the new digital age.

 

Nowadays, methods that enable transactions to be carried out from anywhere have replaced processes that formerly needed a person to visit the bank. But what if there was a way to advance much further? What if there was a method to use software to satisfy every consumer's needs?

 

Open Banking hopes to make this possible. Customers, bank owners, and business owners alike now face several unknowns as a result of its existence. Open Banking is based on information from credit cards, statements, accounts of all kinds, and other financial-related data. After being obtained, this information is synced with the many new apps, which launches an exchange process that streamlines and improves the client experience.

 

Open banking does have its fair share of benefits and drawbacks. Many concerns about its widespread implementation have been raised by the examination of them.

 

What is Open banking?

 

Banks and other financial institutions giving up data for regulated providers to access, use, and exchange is referred to as "Open Banking."

 

Despite what that description would imply, it is not as dangerous as it appears. When a client chooses to share their data with third parties, banks are putting the necessary infrastructure in place to facilitate that process. As an illustration, Open Banking is the technology behind the GoCardless Instant Bank Pay service.

 

This final sentence is crucial. Open banking is not a ruse to make it simpler for banks to sell the personal information of their consumers. The goal of open banking is to ultimately improve client access to financial services, which is precisely the reverse of the original objective.

 

The act of securely exchanging financial information between banks and other service providers, such as fintech applications, is known as open banking. Consumer financial data was under the hands of major banks before the availability of open banking. Consumers can now access and manage their financial information across several platforms, making for a smoother, more customized experience.

 

Open banking may also foster innovation by leveling the playing field for start-ups and tech platforms. To compete with younger, smaller banks for customers, forces established banks to enhance their services. Customers stand to gain from this since they frequently wind up spending less while receiving better technology and customer service.

 

Application programming interfaces, or APIs, are computer programs that act as a middleman between two applications so they may interact. APIs are used by open banking. While utilizing open banking services has some risks, using APIs increases your level of security when disclosing financial information.

 

The information can be used by a third-party supplier to present you with individualized solutions once it has been obtained from your bank. You agree to the use of open banking APIs when you accept the terms and conditions of applications like Mint and You Need a Budget (YNAB), which combine your data.

 

Here are some of the effects of open banking on the many participants in the financial services industry.

 

• Financial services companies: Open banking promotes innovation among banks and outside service companies, giving customers additional options.

 

• Organizations: Open banking data enables organizations to better comprehend the demands of their clients and adjust their product and service offerings.

 

• Consumers: Open banking offers customers access to more effective and tailored digital money management solutions as well as greater control over their financial data.

 

Although open banking is still in its infancy in the United States, some customers may be currently using its services without recognizing it. Open banking software is used by well-known financial apps like Chime and Robinhood.

 

Additionally, a number of the top budgeting applications, like Personal Capital and Mint, use open banking information to give users a central location to organize and manage their finances. Mint compiles your account information to track your expenditure and provide tailored budgeting advice. Platforms like this wouldn't exist or would only be available from traditional banks without open banking.

 

U.S. businesses that wish to deploy this technology are mainly on their own due to a lack of legislative framework and government measures to encourage it. Building their APIs is an option for financial organizations interested in open banking. As an alternative, they might be able to consult the businesses that make the banking software they presently employ. Many of the leading developers of banking software give open banking options including API websites.

 

Importance of Open banking in the Fintech

 

Open banking in particular has contributed to a dramatic revolution in fintech after COVID-19. It includes several strategies to foster collaboration and promote more openness in the financial sector. Real-time data interchange, prospects for other businesses, and group analyses of the gathered data are all included in this.

 

Only customers have the power to initiate any integrations. For instance, the bank grants the client the authority and the required resources to transfer data on bank costs to a budget accounting program.

 

The market is always growing. As a result, intermediary services like TrueLayer provide finance developers with API platforms. A lot of businesses, like PayPal, are progressively transitioning to an open platform model that provides third-party developers with access to payment infrastructure and data via APIs. For instance, in 2019, Visa introduced the Visa Next platform, which combines payment services for fintech and banks that may be used alone or together.

 

Additionally, banks are going toward a single marketplace model with a variety of services, where payments are only one component. For instance, QPlatform operates according to the two-sided marketplace theory. Services in the following areas are available to banks and fintech firms: neo-banking and KYC, credit pipeline and green financing, payments, and acquisition. 

 

The system operates on the same basis as the App Store. A firm chooses the necessary solution, evaluates it in a sandbox, and then quickly integrates it as a fully functional business unit. Another such is the Yolt platform from ING, which offers goods from both the bank and its partners.

 

Once more, open banking gives partner firms via APIs access to banking data so that developers may produce new fintech products and services for the customers of certain banks. Due to the passage of the PSD2-regulation rule, which requires banks to set up an open technical system for integration with its resources, the concept has been supported in Europe for several years.

 

Between 2020 and 2024, the global open banking user base is anticipated to increase at an average annual pace of about 50%, with the European market being the largest. Around 12.2 million people in Europe will use open banking in 2020. By 2024, this number is anticipated to reach 63.8 million. Impressive figures, no?

 

Pros of Open Banking

 

Although the demands of the customer are the main emphasis of open banking, data sharing has advantages for other parties as well. Open banking has advantages for individuals, businesses, and financial institutions.

 

All parties involved profit from open banking in a broad sense by creating new opportunities, and advantages for one party may also benefit other parties. For instance, open banking enables banks to provide more individualized solutions, which is advantageous for customers. However, this also enables banks to broaden their product offers and get additional client information.

 

By utilizing a variety of payment service providers, businesses may greatly benefit from open banking. The key advantages of open banking are as follows:

 

1. Reduce costs:

 

Companies can save money on transactions thanks to open banking. By removing card methods, for instance, transaction costs can be decreased by account-to-account (A2A) payments. The expenses of transactions are increased by the different fees that card providers charge for accepting card payments.

 

Businesses can also save money by selecting a payment gateway provider of cost-effective services. More payment service providers have entered the market and are now able to offer services at affordable prices because of open banking.

 

2. Customer Experience:

 

An improved customer experience is a result of two aspects open banking has created: a competitive environment and digital services.

 

First of all, open banking challenges the traditional ways of banking and has opened the door for more players to enter the market. Creating a competitive environment benefits consumers because, to stand out, companies need to ensure their customer service meets the highest standards.

 

Secondly, open banking has made finance management more straightforward. Thanks to open banking regulations, legacy banks have improved their online services, which has resulted in an improved customer experience. Open banking is moving financial services from in-person to online, which results in quicker and easier finance management for consumers.

 

3. Centralized information:

 

Information that was previously solely maintained by banks can now be shared thanks to open banking. With the approval of the customer, this data may now be sent to authorized service providers, speeding up and simplifying banking procedures.

 

Consumers may now access more services in one location thanks to centralized information. Financial services may better serve their consumers by offering guidance, loan details, and more transparent management of bank transactions.

 

4. Bank and Fintech collaboration:

 

Banks and other financial institutions can collaborate with fintech firms to remain competitive in the rapidly evolving financial industry. As a result, banks may utilize cutting-edge infrastructure developed by fintech firms and stay one step ahead of the competition.

 

Open banking also promotes data exchange between banks and fintech businesses with the aid of APIs. This enables banks to broaden their technological expertise and keep abreast of cutting-edge products entering the market.

 

5. New financial technologies:

 

Open banking made it possible for authorized businesses to participate in the playground, which was previously only open to traditional banks. These businesses provide fresh perspectives and are capable of developing cutting-edge financial solutions that banks seldom ever have the means or desire to pursue.

 

Fintech businesses are rapidly entering the market and providing a range of cutting-edge financial technology that is advantageous to both customers and banks that are open to working together.

 

6. Improved adherence from customers:

 

Banks and financial institutions are under pressure to step up and enhance their products as a result of the intense competition that is arising in the market. Banks are expanding their internet offerings, developing new mobile applications, and providing simple investment choices.

 

Companies that are successful in their digital transformation have increased consumer satisfaction and engagement.

 

Cons of Open banking

 

With so many advantages, it is only fair that open banking has some disadvantages as well:

 

• The state of banks is declining. Some banks are unable to keep up with fintech firms and all the changes occurring in the market. This implies that none of the benefits of open banking are available to their clients. Then, customers seek alternative service providers who may offer better services.

 

• Consumer confidence remains low. Open banking is still in its infancy, and some customers and businesses are taking their time to adjust. To assist customers to grasp the advantages of open banking, however, fintech businesses and other interested parties are working hard to educate users.

 

• There are fewer interpersonal exchanges. Customers now have fewer face-to-face encounters with their banks or financial service providers since most services have moved online. Due to their friendly staff, banks that once had a high level of customer loyalty are now losing business.

 

Conclusion

 

Conventional banking practices are under attack by open banking. Its objective is to introduce innovations into the financial industry and build a system that is focused on the consumer while upholding the greatest security requirements.

 

Although open banking is still in its infancy, it already provides advantages for individuals, businesses, and financial institutions. Nowadays, businesses have access to more affordable payment options, which can increase conversion rates and hasten money transfers. 

 

Greater payment flows, better security, and access to creative financial solutions are all advantages for consumers. Open banking gives customers more options and greater control over their funds. Banks and other financial institutions can work with fintech firms to provide clients with more advanced financial technology.

 

Open banking also has its disadvantages. Some legacy institutions find it difficult to stay current with technology. Users still have a low level of confidence in the new system, and customer relationships with financial service providers on a human level are declining.