The term Open Banking is referred to as the practice in which financial information is shared electronically through a secure digital passage. It works on the primary condition that the customer approves sharing of information. In this process, the third parties are allowed to access the information and use the financial credentials, efficiently. It promotes the development of new services and apps. Open Banking is aimed at providing a better customer experience.
The type of information that is shared with third-party apps is very crucial. In most cases, the APIs provide the app with direct access for information pertaining to an account balance or a specific detail about the transaction. The customer is not required to share the password with anyone.
Effects of Open Banking
Application Program Interface (API) allows various systems to interact among themselves and poses as a universal power socket in the digital sphere. There are several ways in which the concept of Open Banking has revolutionized the banking sector; some of them are:
• Transformation of Banking Industry
APIs have in a way revolutionized the way payments are processed in the digital banking sphere. FinTechs are able to process the payments at a much faster pace with more security and efficiency. This enables major e-commerce players to offer products directly through their platform, instead of other banking sites.
• Help in Attracting Customers
The Open Banking system helps small and mid-sized financial banks to be able to attract new customers, by providing them easier payment options and account switching process. It also helps to remove the friction involved with various providers regarding having multiple accounts.
• Helps Businesses to “Scale-Up”
The function helps various FinTechs and financial service providers by enhancing their ability to grow and upscale their business quickly. It also makes them independent by providing them the access to crucial data.
• Enable Consumers to Control Their Finances
Open Banking applications allow consumers to gain better control over their financial transactions and make the transactions easier. It helps them to understand
how to use financial transaction data effectively and improve financial insights and improve financial literacy.
• Making Things Easier for Suppliers
Open Banking is aimed at easing the payment function among businesses, and it provides the suppliers with a lot of options to streamline their payments. The new payment architecture allows the option to merge several online payment channels, instead of using the traditional Direct Debit, which is confined to one bank account.
• Data Security
Managing risks related to security would be a significant challenge with the advancement of Open Banking. There is a chance that the lack of identical technical standards might give rise to a susceptible process giving rise to corruption. Businesses would be required to form a strategy as to how they would safeguard the sensitive data against fraudulent activities.
The fundamental of Open Banking is aimed at developing new technologies and innovation, which are already taking strides at a fast pace. It is set to increase competition among banking providers and FinTechs.