Open banking is a secure method by which individuals can give third-party fintech companies access to their banking data, usually through websites and apps, or authorize payments directly from their bank account.
As it involves these three parties (the consumer, the bank/non-bank FI, and the fintech), open banking allows for the sharing of banking data specifically (hence its name), which includes account information and payments initiation. With open banking, fintech companies are able to provide a number of services, such as:
- Account aggregation where consumers can see multiple bank accounts across banks in one dashboard;
- Transactions tracking where consumers can categorize payments and view spending habits, tracking financial goals and set spending limits;
- Service comparison where consumers can shop for the best deals;
- Know your customer (KYC)
- And more.
An Example of Open Banking
Alice uses a mobile Personal Financial Management app to manage her daily budget. She consents to link her bank accounts directly to the app, thereby allowing the application to access her banking information. As she makes purchases throughout her day, the application is able to capture her payments right away and more accurately.
At the end of the month, as she reviews her purchases, she learns she is spending more budget than allocated on eating out in restaurants, particularly the two restaurants near her building. The app suggests she stock up on home groceries to reduce the temptation to go out to eat, while also suggesting a coupon for a meal delivery kit that fits into her budget.
There are two main outcomes from open banking data sharing.
- Consumers have full control over their data, and can decide what information they share and for how long, and their data is more secure.
- Apps are able to better analyze and personalize the consumers’ data to enhance the user experience.
How does Open Banking work?
Open banking works through application programming interfaces, or APIs. APIs are sets of codes and protocols that allow for software and apps to connect and communicate with each other. In banking, APIs connect third-party fintechs with banks, creating a trustworthy financial ecosystem to share banking data.
Not all banks make APIs available to third-parties, and this is underlying the discussions around creating open banking standards and laws in the U.S. and Canada.
- Click here for the latest on the Consumer Financial Protection Bureau’s latest on financial data rights rule-making.
- Click here for an overview of Canada’s open banking development.
Without open banking, third-party fintech apps and websites can access consumers’ banking data through screen-scraping and account-linking.
With screen-scraping, fintechs need to obtain consumers' online banking credentials (username and password) to log in as the consumer, and copy the transaction data within the consumers’ bank account. There are several issues with screen scraping.
- First, it requires the consumers to share their banking credentials which is inherently insecure.
- Second, online banking platforms often change or update their sites, resulting in disconnections, or “data breakages” which creates instability and inconsistency in services.
In the context of data access, account-linking describes the process by which data aggregator companies have agreements with banks and FIs.
Instead of needing bank account log-in information to access and screen-scrape transaction data, the fintech app can form a connection with the consumers’ bank accounts and directly access or “call” the required data.
Account-linking is more secure than screen-scraping, but due to the high number of banks and FIs that exist, it is arduous to create agreements and infrastructure with them all, making it difficult to scale.
Open Banking Around the World
Open banking is beginning to take shape in North America as relevant government bodies, such as the U.S. Consumer Financial Protection Bureau (CFPB) and the Canadian Advisory Committee on Open Banking, determine guidelines and regulations overseeing its governance.
In other countries, such as the United Kingdom, Australia and more, open banking exists and are in different stages of development. There are over 50 countries rolling out open API initiatives. Here are resources to learn more about how some of these countries and regions are implementing the technology:
Australia - New Payments Platform
Canada - Open Banking
Hong Kong - Open API Framework
India - Unified Payments Interface (UPI)
New Zealand - Open Banking
Singapore - SGFInDex
United Kingdom - Open Banking
United States - Open Banking
Europe - P2D2
Business Use Case - Credit Risk Assessment
When lenders assess the creditworthiness and risk of a credit applicant, they rely on limited data, such as the applicant’s debt, income, and credit score. Additionally, there are about 26 million people in the U.S. who are “credit-invisible”, meaning that they have no credit history with one of the national credit reporting agencies: Equifax, Experian and TransUnion. In the U.S, this problem is particularly prevalent amongst Black and Hispanic people and those in low-income neighbourhoods, aggravating existing inequalities.
Under open banking, lenders can make credit risk assessments more efficiently, saving time and reducing errors. Instead of gathering documents from various banks and non-bank FIs, they can see a broad overview of all accounts and debts. As open banking develops into open finance, lends can access and take into consideration a wider range of credit-relevant information, such as on-time rent and mobile phone payments.
Credit risk assessment using open banking is already underway in Europe and the U.K., such as with CRIF, a provider of credit information. CRIF company uses open banking to connect consumers’ current accounts and access real-time, accurate information about their financial information. This data is then categorized to build a richer profile about the consumers’ overall financial health, taking into consideration spending habits, cashflow forecast, credit risk, etc.
Why is Open Banking Important?
Open banking is quickly growing. By 2024, an estimated 132.2 million individuals will be using open banking services worldwide, especially in Europe which will have 63.8 million users. In the U.K., as of June 2022, 10-11% of digitally-enabled consumers were active users of at least one open banking service.
Open banking is a powerful tool for financial ecosystems with numerous benefits for consumers and businesses. Consumers get better and more reliable fintech products and services, while also protecting their data. Businesses are able to operate smoothly, create more innovative products and services, and have higher customer satisfaction.
Direct payment authorization is another key benefit, allowing for instant settlement, lower cost relative to card, accurate automatic reconciliation and more.
Open Banking and Olive
As an embedded finance platform, Olive delivers open banking services for clients. We expand our capabilities beyond financial data by focusing on outcomes. What kind of outcomes? Simply put, the ones that matter for your customers, and therefore, for your business. Whether it's helping to invest, save, donate or purchase, Olive can power goals.
For more information, check out Olive's use cases. You can also chat with an Olive expert.