Open Banking rustled a lot of leaves with its entrance into the financial service scene. It opened up a vista of opportunities for customers and lenders. It is not too much for one to say that Open Banking has changed the face of banking worldwide. Developed in the UK, it did not take much longer for open banking to spread worldwide like wildfire. The EU followed the UK, and countries like Hong Kong, Singapore, Brazil, and Australia immediately followed suit.
If you are still wondering what all the buzz surrounding open banking is about, this blog will aid you in wrapping your mind around the concept.
What do you mean by Open Banking?
Open banking is a banking technique that requires banks to share information with third-party service providers with the customer’s consent.
Open banking intends to level the playing field. It forces established banks to be more competitive with newer banks. The result of this will be lower costs, improved technology, and superior customer experience.
How does it work?
Open banking is about data. It delegates application programming interfaces (APIs) to give third-party financial service providers access to a customer’s financial information from banks and any other financial institutions. The goal is to provide fintech companies or third-party service providers, typically tech startups and online financial service vendors, a gateway to a customer’s financial information and conduct financial transactions on their behalf.
Open banking has had a massive impact in India through the Unified Payments Interface (UPI), allowing fintech firms to connect with banks, gain access to their data, and provide comprehensive financial services to their customers. [*YourStory]
The Benefits and the Risks of Open Banking
The Benefits
- Account aggregation – It centralizes all user accounts, making an overview of various accounts simple.
- Quick credit applications – Lenders gain an instant view of the applicant’s credit history.
- Spending information – Identifies harmful spending patterns and puts a payment block.
- Improves online payment experience – Makes the payments faster and flexible. It can also replace card payments.
The Risks
- Customer credibility – Some customers may not have a soft spot for open banking. They might feel vulnerable sharing their financial data with third-party sources.
- Security threats – Third-party sources like small startups cannot match the same level of security as a conventional bank. They could be ideal targets for an attack as they possess customer data. Attackers may also mimic fintech companies and launch phishing attacks.
- API risks – If the level of coding is not up to the mark, there exist API risks. Third-party providers must ensure that their apps meet the required standards.
Despite these risks, open banking is solidifying its presence throughout the world, which indicates that the risks can be mitigated. Asia is the new open banking capital. Among the Asian countries, Singapore was the first to adopt open banking. The Monetary Authority of Singapore (MAS) was the first to provide instructions and a legal framework for open banking. [*BBVA API_Market]
Cloud Technology & Open Banking
Cloud technology has taken the world by storm. Many industries have already made the transition to the cloud because they fear for their survival, which is not different in the case of financial service organizations. Several notable banks already recognize the importance of the cloud and have already made the transition.
How does the cloud help open banking?
Minimizes security risks
Cybercrime is a potential threat to banks. The cloud offers the highest standards of data security.
Offers scalability and flexibility
Open banking success is closely tied to data and the ability to process large volumes of data efficiently. When data volumes fluctuate, the cloud provides flexibility and scalability, which helps deliver an enhanced customer experience.
Streamlines the development process using microservices
Banks seeking to boost their agility can embrace the capabilities offered by microservices. Moving to the cloud increases processing efficiency and protects the bank from technical innovations and the need to schedule upgrades.
Conclusion
Open banking is the future. It’s just a matter of time before the world witnesses more countries and banks warming up to the idea of open banking. According to a recent Finastra research, 95% of Hong Kong banks believe collaboration is a key driver of success. In contrast, in Singapore, 90% of banks say collaboration increases efficiency. [*Finastra]
Open banking has transformed the rules of the game, enabling the formation of new, more competitive digital ecosystems in which traditional players coexist with new players and both are committed to innovation.