Open Banking is hailed as the most revolutionary financial regulation of the 21st century and the best thing to happen to consumer finance since the credit card. In this article, we'll be taking a look at what open banking is, how it works and who it benefits, as well as the global impact open banking has created for financial inclusion initiatives across the globe.
Although the idea of open data sharing not new, Open Banking as we know it today is an initiative propelled by the The Competition and Markets Authority (CMA) in the UK. Simply put, open banking helps consumers and businesses get instant access to and have better control over their data. Banks have historically had plenty of information about all the transactions their customers make, but have not used this resource. With open banking, any licensed third party service provider can, with the user's consent, view their transaction data in order to deliver a value-adding service or product.
Open banking is the biggest industry effort to enact the regulatory benefits outlined in PSD2 (Payment Services Directive 2) - the EU's Payment Service Directive aimed at making payments safer, increasing consumer protection and securing equal grounds for innovative competition. Both open banking and PSD2 are considered complimentary initiatives.
As Wired explains, to get the process started, The Open Banking Implementation Entity (or simply Open Banking Limited) worked with the UK's nine biggest banks on releasing “their data in a secure, standardised form, so that it can be shared more easily between authorised organisations online.” Open banking facilitates data sharing between banks and third parties, but it's ultimately the consumer who decides which information they want to share, if at all. Data sharing is enabled via application programming interfaces or APIs, that are designed to provide secure data sharing between banks and licensed service providers.
Open Banking was established with two specific goals; first, to improve consumer experiences.Traditional financial service providers are known to be slow to innovate, leaving customers with outdated offers. BBC reported that 75% of UK's consumers have never changed their bank. Open banking-driven secure data sharing enables challenger banks to offer consumers better financial products and offers, such as income management, spending insights and transaction-based special offers. Simply put, open banking helps consumers take control of their digital finances.
Second, open banking was designed tofoster competition in the banking sector. A UK banking report from 2016 found that traditional banks with established customer bases didn't have to try as hard for new business as emerging banks. This put smaller banks at a disadvantage. Open banking paves the way for the adoption of innovative products and services that can help small and mid-sized businesses get better deals for lending, marketing, or any other account data-based decisions.
EU's PSD2 directive and UK's Open Banking initiative have highlighted the benefits of regulated data sharing systems for businesses and consumers worldwide. In their article on thecross-industry data sharing ecosystem, Deloitte point out that all global open banking-driven initiatives outside the UK and Europe fall roughly into two categories - market drivenand regulatory driven.
Propelled by changes in their respective markets, the US, India, Japan, Singapore, and South Korea currently have no formal open banking regulations, but their policy makers are taking proactive steps towards establishing an open banking-based, united data sharing standard across their respective banking industries.
Only two countries outside the EU are presently adopting a regulatory-driven approach to open banking adoption - Australia and Hong Kong. The Hong Kong Monetary Authority delivered an Open API framework in July 2018. Australia, on its part is close to passing a Consumer Data Right Act (CDR) that would allow consumers open access to all their digital transactions, including phone bills, energy and banking, as well as the right to determine who can use their data and how.
As Deloitte points out, for countries only now adopting open banking standards, the initiative “promises to create a new data sharing infrastructure, which will form the basis of a much richer range of services and products across the whole of financial services, and critically, in other industries as well.”
At Nordigen, we strongly believe that a worldwide adoption of open banking will greatly improve the financial lives of billions of people. We therefore see it as our mission to ensure a global adoption of open banking.
The most important potential benefit of open banking is a radically enhanced public’s experience with financial services industry. This customer centricity enables greater financial transparency and financial inclusion of traditionally underserved markets.
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In recent years, tech giants like Apple, Google and Amazon have started planting flags in the financial sector, intruding on traditional financial institutions. Facebook is finally joining the race with Libra, its digital currency described as a “simple global currency and infrastructure that empower billions of people.”
As a society, we are gradually moving away from paper cash, increasingly gravitating towards alternative digital payment methods - contactless-cards, cryptocurrency, mobile and wearable technology. Regulatory driven initiatives like EU's PSD2 and UK's Open Banking are propelling financial innovation and enabling the emergence of new products and services.