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Open Banking Initiative

If you’re in the financial industry, the tech world, or otherwise, you might’ve heard about open banking. The impacts of the open banking initiative are beginning to emerge on a global scale. But what exactly is open banking and why is it important?

What is the Open Banking Initiative?

The term Open Banking Initiative refers to the process of building and deploying APIs in the financial sector that can be used across multiple industries. These APIs are designed to allow a secure and mutually beneficial exchange of data between organizations. This secure data exchange allows financial institutions to partner with other entities to offer a richer menu of services to their customers.

For example, Wells Fargo is currently using an open banking initiative. They do so for the purpose of sharing data with firms such as Turbo Tax, QuickBooks, and Xero. The secure exchange of data between these organizations allows the customer’s needs to be met in an innovative way.

What Problems Does Open Banking Solve?

The open banking initiative has the potential to solve a variety of problems. Most of the problems stem from data security and protection, but there are other considerations, as well.

Screen Scraping

The number one problem that can be solved by open banking through APIs is called screen scraping. The practice of screen scraping is highly prevalent across many industries but is insecure and puts customer data at risk. Building and deploying secure APIs for open banking renders screen scraping irrelevant and unnecessary.

Lack of Collaboration

Another issue that can be solved by open banking is the lack of collaboration between organizations. When organizations want to collaborate to better serve consumers, but cannot do so because of technology issues, they often resort to less-secure methods of partnership, or no partnership at all. When organizations avoid partnering with one another, the innovative nature of collaboration becomes absent from the marketplace. Deploying open banking APIs removes this barrier and allows organizations across various industries to collaborate and create products and services that serve consumers in a more effective way.

Lending and Financial Management

Open banking, if deployed and used effectively, could help consumers secure more lending and financial products than were previously available to them. For example, if a consumer wants to secure a loan from a lender and the lender is using an open banking platform in collaboration with the consumer’s bank, the lender will have access to historical data to help the consumer choose the right product. While this is currently done manually in many situations, the automated nature of secure data sharing between the lender and the bank can make the process seamless and easier than before.

What Countries are Participating in Open Banking?

Open banking is not yet a global initiative, but there are several countries participating. The UK pioneered the Open Banking system and effectively rolled it out to the European Union (EU). Other countries began subsequently developing their own initiatives. Countries currently in some stage of development or implementation include:

  • The UK
  • Australia
  • The United States
  • Japan
  • Singapore
  • India
  • South Korea
  • Canada

This is not an exhaustive list but gives a good perspective of breadth of open banking initiatives across the globe. These countries’ initiatives fall into one of two categories: market-driven and regulatory-driven.

Market-Driven Initiatives

The US, Japan, Singapore, and others fall into the “market-driven” category. Their banks and third-party providers are at liberty to develop their own APIs. The government supports and encourages collaboration between entities but does not regulate those activities. The key concern here is that screen scraping continues to be prevalent. Without policy and governmental involvement, many organizations choose to continue operating as-is, rather than try to build a new API to allow open banking.

Regulatory-Driven Initiatives

On the contrary, Australia, Hong Kong, the UK, and EU, all have regulatory-driven initiatives that are making open banking the norm in those countries. The governments in those countries have provided specifications for the APIs and how they should be built. Participating organizations must build them accordingly and their activities are monitored by the government.

How are Countries Preparing for Open Banking?

Implementing an open banking initiative is a heavy lift for any country that chooses to do so. These countries must prepare in a variety of ways, including the following:

  • Writing policies for data sharing between entities and limitations thereof
  • Finding the right organizations to build the API structure, including firewalls, dedicated gateways, and fraud detection systems
  • Preparing organizations for collaboration by sourcing existing and new partnerships
  • Evaluating participating firms for compliance with General Data Protection Regulation (GDPR)
  • Providing options for organizations to improve their current data management systems
  • Evaluate other countries that have already successfully implemented open banking and learn new strategies from them

If a country truly wants to be successful with the rollout of an open banking initiative, they will need to consider all the above tasks. Open banking can improve processes across multiple industries if implemented effectively.

How Will Open Banking Affect Consumers?

Open banking will (hopefully) affect consumers in a positive way. The public will have access to more services than were previously available. This will be in large part due to the ease of data transfer between partnering organizations.

Generally speaking, open banking will afford consumers the following benefits:

  • Aggregation – With all their data being shared in one place, consumers will be able to quickly make financial management decisions without logging into multiple applications or searching for financial documents on various platforms.
    • Example: Mobile applications that aggregate a customer’s bank accounts, credit cards, investments, etc. into one app for easy viewing
  • Monitoring – With all data being stored in one place, consumers will be able to easily monitor their identity, credit scores, financial health, and more.
  • Automation – Consumers will experience faster transactions on a variety of platforms due to the easy transfer of data between organizations.

The key concern for some consumers is data security. If data is being shared between more organizations more easily, many consumers view that as a potential risk of fraud or identity theft. However, it’s important to note that open banking is highly likely to be more secure than the current screen-scraping technique that is being used in the United States.

Overall, open banking is likely to become the norm in the United States. It has been slow moving forward, as panels and regulatory bodies are being built to support and enforce it. But make no mistake, it is coming!