Introduction
Every day, the world is becoming more technologically advanced than before. The technological advancements have changed the ways different businesses operate as they adapt to the new ways of the digital era. Banking systems are one of the businesses that have been forced to adapt to meet customers’ expectations and requirements.
What is Open Banking?
Open Banking refers to new regulation that requires banks to provide third-party service providers with access to consumer financial transaction data and the ability to initiate payments on their behalf. The regulation forces them to provide this access and data to third parties from regulated financial and non-financial institutions via the use of Application Programming Interfaces (APIs). The data is obtained from customers with their consent by a simple registration which links the third party to the bank account. Along with being consensual, it is also more secure and standardized because of use of APIs. Third-party service providers use this data to develop applications and services for their own customers.
What is API?
APIs are essentially a set of functions and interactions between two or more than two applications. APIs allow the data to be exchanged, which can inform the financial service providers about the purchasing patterns of customers, loan needs, future income projections, etc. It also suggests customers the most suitable financial products and services, such as a new account, depending on their history.
The data that is collected by third-party service providers are used for various purposes. One of the purposes is to build marketing profiles, which helps in designing more targeted marketing campaigns. Moreover, the data can be used to compare customers’ transaction history and accounts to the financial services available in financial and non-financial institutions.
Benefits of open banking
Open Banking is not only beneficial for consumers; it also benefits businesses like lenders. Through accessing customer accounts, lenders can see customers’ financial data and assess the risk level. This allows them to offer the loan terms accordingly.
This new technology initiative has contributed to the growth of the financial services industry. It has helped fintechs and banks form a stronger relationship with their customers by providing them with better financial services and by helping them manage their finances more efficiently.
Open Banking solutions are increasing innovation as the services are becoming more tailored to individual requirements. It also helps small and new banks as it promotes collaboration between small and large financial institutions, which ensures better technology, better services, and lower costs.
Conclusion
Open Banking is an initiative driven by the regulators within Europe with the goal of creating more competition and better products and services for consumers. As a relatively new concept, the impact is still to be seen and businesses are still yet to harness its power. More use cases are being seen every day and its impact on the way consumers engage with financial products and services will be huge.
