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By Bill Camarda
Open Banking promises to unleash a new wave of financial industry innovation, competition, and productivity, enabling valuable new payment and other financial services for both businesses and individuals.1 Its advocates envision new offerings ranging from "novel mobile services that intelligently transact real-time in multi-currencies based on geo-location" to automated financial assistants that make voice recommendations based on algorithms that track a customer's transactions across institutions.2,3
But what exactly is open banking? And what will it take for these promises to become reality?
Open Banking encompasses standards, tools, techniques, processes, and infrastructure that permits customers to securely share their financial data across financial institutions. Once this data can be routinely shared, advocates say, it will become easier for customers to get the financial services they want, from whatever providers they prefer to use, including payment services provided by non-financial services entities.4
Open Banking typically relies on Application Programming Interfaces (APIs) to manage and automate the connections between financial institutions that enable functions like payment services. If customers give permission, these APIs can expose data, algorithms, and/or processes to other institutions they choose.5 Both information and transactions could be shared, so customers can more easily compare the costs and benefits associated with competitive payment service offerings, and transfer funds with less friction.6
By making it easier for financial institutions to access more complete information about their customers or prospects, Open Banking could allow them to extend services to more customers, while safely managing risk. For example, if a creditor can gain a more rounded picture of a small business applicant, that creditor might be more willing to lend, or to offer a more competitive rate.7 So-called "Affordability Checks" could accelerate loan decisions by giving lenders one-time access to a user's bank data rather than demanding manual uploads of statements.8
So, too, Open Banking could simplify accounting by enabling more small businesses to automate payments services and other transactions, and reconcile payments across all their financial relationships. As the U.K.'s Open Banking Working Group (OBWG) puts it, "all a business owner would need to do is log into their accounting platform, select relevant bank accounts and give their permission for the data to be shared."9
Around the world, these potential benefits have encouraged many regulators and industry players to start planning for Open Banking environments. For example:
Any initiative to share customer financial data beyond the walls of a single institution raises issues of security and privacy. Will these systems be safe? Will customers believe they are? The perception issue may be partly generational. Another 2016 Accenture survey of U.K. and Ireland consumers reported that 85 percent of those aged 18-24 would trust a third-party to aggregate their payments and other financial data, but only 48 percent of those aged 55-64 would.15 The Canadian Bankers Association – in encouraging Canada to go slow with Open Banking – identified several security and privacy issues:16
These issues may require careful consideration from all stakeholders, and fast: 99 out of 100 large bank payments executives anticipate major Open Banking investments by 2020.17
Open Banking APIs for sharing customer data between institutions may enable many innovative new payments and other financial services for businesses and consumers, if security, competitive, and regulatory hurdles can be overcome.
Bill Camarda is a professional writer with more than 30 years’ experience focusing on business and technology. He is author or co-author of 19 books on information technology and has written for clients including American Express Private Bank, Ernst & Young, Financial Times Knowledge and IBM.
Sources
1. Review into Open Banking in Australia, Australian Government; https://static.treasury.gov.au/uploads/sites/1/2017/08/Review-into-Open-Banking-IP.pdf
2. “Open Banking APIs are Not Created Equally,” Bank Innovation;https://bankinnovation.net/2017/09/open-banking-apis-are-not-created-equally/
3. “Applications that use the Open Bank Project API (Clare.ai),” Open Bank Project; https://openbankproject.com/apps/
4. “Definition of 'Open Banking,” Investopedia; https://www.investopedia.com/terms/o/open-banking.asp
5. Open for Business, Accenture Consulting; https://www.accenture.com/t20170629T215524Z__w__/us-en/_acnmedia/PDF-56/Accenture-Strategy-Digital-Open-Banking-POV.pdf
6. Review into Open Banking in Australia, Australian Government; https://static.treasury.gov.au/uploads/sites/1/2017/08/Review-into-Open-Banking-IP.pdf
7. Introducing the Open Banking Standard, Open Banking Working Group; https://hollandfintech.com/wp-content/uploads/2016/02/298568600-Introducing-the-Open-Banking-Standard.pdf
8. “What is the Open Banking Standard?” Fin; https://fin.plaid.com/articles/what-is-the-open-banking-standard
9. Introducing the Open Banking Standard, Open Banking Working Group; https://hollandfintech.com/wp-content/uploads/2016/02/298568600-Introducing-the-Open-Banking-Standard.pdf
10. “Open banking movement gains momentum internationally,” Fin; https://fin.plaid.com/articles/international-open-banking-us-takeaways
11. Open for Business, Accenture Consulting; https://www.accenture.com/t20170629T215524Z__w__/us-en/_acnmedia/PDF-56/Accenture-Strategy-Digital-Open-Banking-POV.pdf
12. “Open banking movement gains momentum internationally,” Fin; https://fin.plaid.com/articles/international-open-banking-us-takeaways
13. Ibid.
14. “Accenture Research: Most Large Global Banks Planning Major Investments in Open Banking,” Accenture Research; https://newsroom.accenture.com/news/accenture-research-most-large-global-banks-planning-major-investments-in-open-banking.htm
15. Consumers’ initial reactions to the new services enabled by PSD2, Accenture Payments; https://www.accenture.com/t00010101T000000Z__w__/gb-en/_acnmedia/PDF-29/Accenture-UK-Banking-PSD2-Consumer-Reactions.pdf
16. Review of the Federal Financial Sector Framework, Canadian Bankers Association; https://www.cba.ca/Assets/CBA/Files/Article%20Category/PDF/sub-20170929-review-federal-financial-sector-framework-en.pdf
17. “Accenture Research: Most Large Global Banks Planning Major Investments in Open Banking,” Accenture Research; https://newsroom.accenture.com/news/accenture-research-most-large-global-banks-planning-major-investments-in-open-banking.htm
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