Open banking has been around for a long time, though it had never been utilised to its full potential due to the lack of technological advancements and regulations. Open banking meaning is simple - opening bank data to third parties. Third parties can be anyone that has the authorisation to deal with financial data and is not a bank itself. In other words, open banking enables third party financial service providers to obtain consumer financial account information. This includes transactions, payments, loans etc. The data sharing is conducted via the Application Programming Interface (API).
The use of APIs and open banking enables involved parties (consumers, banks, third parties) to connect to a network of individuals' financial accounts scattered among various banking institutions. However, the only way for a Third Party Provider (TPP) to access that data is by obtaining consent from a customer who requested this service. Consent can be given in various ways - checking a box, entering information, agreeing to proceed with the service and so on.
Open banking meaning is not referring to creating one standard way for legacy banks and TPPs to interact, but rather to encourage competition among legacy banks and smaller financial institutions.
As mentioned above, the meaning of open banking is straightforward and describes a process where legacy banks open up their information to TPPs. TPPs can have various levels of authorisation to access data. It can only view and gather financial information from all financial accounts in one place, it can be used to initiate payments or to share with financial institutions for data evaluation.
All the banking institutions and financial service providers are mandated to implement technological infrastructure to make data accessing and sharing safe and secure. Therefore, the risk of fraud is reduced to the minimum and leakage of personal data is eliminated.
The purpose of open banking is to enrich customer services by inviting new competitors to the financial market and encouraging the emergence of new products created due to open APIs. The meaning of open banking brings benefits to all three involved parties - consumers, financial institutions and businesses. To consumers it means more reliable and effective ways of managing financial data, investment opportunities and easier application processes for loans. To financial institutions it means new product development and open horizons for limitless innovation. To businesses it means more effective financial tools and cost reduction.
The innovation produced by financial institutions ultimately will lead to more automation in payment processes, therefore, businesses can save on manual labour and time consumption.
In the past legacy banks got extremely comfortable with their way of business that confined their customers in the financial market which lacked innovation. Banks offered outdated products which lengthened customer journeys, slowed payments and borrowing processes. With the launch of open banking customers had a choice to switch to challenger banks that offered innovative solutions to their everyday problems while providing outstanding customer service.
Consequently, legacy banks were forced to develop their customer service and find new product solutions if they wished to keep their customers. In other words, legacy banks had to turn around their operational strategies and switch focus to consumers instead of vice versa.
The key four benefits brought by open banking are convenience, reduced costs, personalised services and enhanced decision-making process. However, when inspected closely they all blend together. For instance, open banking allows access to the user's financial data (a user can be both a business or an individual) which enables TPPs to personalise their offered service to that user. By receiving a personalised service or content, users can make a decision faster which in turn reduces costs for all involved parties as the number of steps in the decision-making process shortens.
Further, because more TPPs come to the financial market it allows to create broader service offerings and also reduce prices due to the increased competition. As a result, open banking meaning lies behind the fact that it unleashes the potential of legacy banks and other financial institutions across the European Union (EU) and the European Economic Area (EEA). Confidently, shortly the benefits will become clearer to the consumers and increase the use of online banking services with the implemented automation solutions.
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