Open Banking gained significant momentum in 2021 – spurred by the pandemic – and could be set for its best year yet in 2022. More than 60 countries have launched open banking initiatives, and this transformative trend is likely to continue, either regulatory-driven or market-led.
Open banking is predicated on a simple idea that consumers are the owners of their financial data, free to access and share that data or information however, and with whomever, they choose. This core principle of open banking enables consumers to voluntarily (with their permission) share their financial data with other entities (third-party providers). These third-party providers (TPPs) access customer data held by their bank via application programming interfaces (APIs). APIs are software intermediaries that allow two applications to talk to or communicate with each other to access information or data.
Open banking adoption would make it easier for neobanks to become customers' primary banks and would also help banks partner with fintechs. Banks would be able to understand their customers better and increase the number of tailored products and services. Customers will be able to access different financial products and services from one place and at the exact moment they require it with greater transparency, and corporations will be able to avail themselves of an alternative conduit through which they can undertake their primary cash management requirements and streamline their treasury operations.
While open banking is likely to alter the competitive landscape of the financial services industry, the benefits of open banking are overshadowed by unfounded misconceptions. We attempt to debunk four common myths about open banking.
Myth #1: Open banking is doom and gloom for banks
Banks will be forced to make customer data available to TPPs through secure APIs, and this will mean a more empowered and informed customer, more at liberty and with control over where, when how and by whom their data is used. However, banks would continue to remain a trusted custodian of their customers’ assets and a licensed financial institution that offers value-added, secure, expeditious and efficient personal and commercial deposit, lending, investment and retirement products and services.
TPPs may get access to customer data with their consent, but they would not be able to turn into a bank, replicate core banking solutions so easily, or customize and make relevant their financial product and service offerings as per the evolving financial needs of their customers.
Open banking will help banks become more futuristic. Banks will be able to access and integrate innovations taking place outside of their organization or industry and move beyond being a provider of valuable information. It will also gain access to discerning insights about customers, which can help banks transform customer experience and make their offers more appealing.
Myth #2: Customer information and data can be shared without their consent
Before open banking, banks held customer data. With increased adoption of open banking, banks, fintech companies, and TPPs will not be able to share data without customer consent. Each trusted service provider will ask for customer consent before accessing their accounts, balance and important information. Only if customers opt-in can they share and use customer data.
By opting in, customers can choose to share their data with a wide range of companies that may offer them more competitive products and rates. Sharing of data is a choice, and customers can withdraw their consent whenever they wish to do so.
Myth #3: Open banking isn’t secure
Open banking will increase the flow of and access to data, but because it works using a consent system, it gives the customer much more control over who can access their data and for how long.
Open banking regulations mandate that banks create secure APIs (and with further adoption of API standards that require technical authorization, user authentication and consent management as layered security) through which TPPs can gain consented access to their customers’ data. This means that while using open banking, users do not have to share passwords or sensitive login information, so the bank login credentials remain completely unknown to any TPP.
Secure open banking APIs give the user and the bank openness and transparency with regards to who is pulling the data as opposed to someone posing as the customer to access the information.
Myth #4: Open banking doesn’t simplify the banking processes
Open banking isn’t complicated and is designed to simplify the banking processes. Something as simple as a payment request is even more streamlined via open banking.
With Request to Pay, open banking billers can request payments in the form of a simple message instead of relying on credit and debit cards. Payers have the flexibility to make full or partial payment by the due date. Here the payments are made and received directly between the biller’s (payee) bank account and the payer’s (customer) bank account rather than being routed through credit card and debit card payments that come with higher processing costs. Also, with the account balance updated instantly (real-time), it makes the settlement process more transparent and efficient.
Open banking offers a cheaper, convenient, quicker, easier and more secure alternative to credit card and debit card payments. Customers don’t have to key in or manually enter a 16-digit card number or trust a website to store their card details. They simply select a bank from a list and confirm payments with a single fingerprint or face ID. If a company uses open banking APIs to process payments instead of cards, it could save a lot of money.
In 2020, according to the data provided by Statista, there were over 25 million users of open banking services worldwide, a number that is forecast to reach 132.2 million by 2024. Europe houses nearly half of the users. As per Statista, the number of open banking users worldwide is expected to grow at an average annual rate of nearly 50 percent between 2020 and 2024, with the European market continuing to be the largest.
In the near future, open banking can democratize data and financial services to reshape the global financial ecosystem and redefine relationships between banks and their customers - corporations, small and medium-sized enterprises, and retail customers. But before that, there are misconceptions that exist around open banking.
With a concept as relatively new as open banking, it’s no surprise that it isn’t always well understood. We hope this article will help improve your understanding of open banking.
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