Open banking is a practice that allows third-party providers free access to financial data. APIs (Application Programming Interfaces) get transactions, consumer banking, and other information from banks and other businesses to expand the number of products or services that become available to the consumer.
The expansion of open banking processes offers the potential to reshape the competitive landscape of the entire industry. It also comes with several critical risks because more consumer data becomes available to providers who might not be as protective of it as the home institution.
How to Understand Open Banking
Open banking allows an institution to have access to and control of a customer’s financial and personal information. This structure enables them to send that data to third-party service providers that are usually online vendors or tech startups within the industry.
This access is not something that happens automatically. Customers must usually provide consent to allow their financial institution to have this level of access to their data.
It is usually a box that gets checked or an agreement through a terms-of-service screen that grants this permission. Once given, there should be ways for a customer to change their mind if they no longer want to grant access to their data.
APIs from these third parties can then use the shared information to compare accounts, transaction histories, and other data. The goal of open banking then is to create a marketing file or encourage account changes that benefit the consumer while increasing the chance to earn a profit from those activities.
What Is the Promise of Open Banking?
Although there are privacy risks to consider, open banking makes it easier for customers in the financial services industry to share information that can lead to wealth improvement. It can vary from a change in the structure of a portfolio to improve dividend earnings to the recommendation to open a new savings account that has a better interest rate.
Open banking also makes it possible for consumers to find new credit cards with lower rates or better benefits to make money stretch further.
Because of the freedoms offered by this structure, open banking forces large institutions to become more competitive. Smaller banks become more disruptive with access to this information, so the goal is to create better customer service, lower costs, and technology improvements simultaneously.
Open banking also gives institutions a chance to improve their customer relationships. Investing in methods that work to personalize the experience makes it easier to retain consumers because of the goal shifts from facilitating transactions to managing their finances.
What Are the Risks of Open Banking?
Open banking is not entirely free of risk. There is always a chance that a malicious app might try to steal customer accounts. The concerns of data loss to unauthorized parties is a real threat that requires daily examination. Even insider threats like the one Capital One experienced with a provider could reduce the willingness of customers to share information.
According to Deltec Bank, “An improvement to the competitive landscape of the financial services industry will benefit consumers.” Open banking makes it easier for everyone to operate on an economy of scale, which is why it will create benefits for both sides of the transaction.
Disclaimer: The author of this text, Robin Trehan, has an Undergraduate degree in economics, Masters in international business and finance and MBA in electronic business. Trehan is Senior VP at Deltec International www.deltecbank.com. The views, thoughts, and opinions expressed in this text are solely the views of the author, and not necessarily reflecting the views of Deltec International Group, its subsidiaries and/or employees.
About Deltec Bank
Headquartered in The Bahamas, Deltec is an independent financial services group that delivers bespoke solutions to meet clients’ unique needs. The Deltec group of companies includes Deltec Bank & Trust Limited, Deltec Fund Services Limited, and Deltec Investment Advisers Limited, Deltec Securities Ltd. and Long Cay Captive Management.
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