But what exactly is open banking? And what will it take for these promises to become reality?
What is Open Banking?
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
How Open Banking Might Help Financial and Payment Services Customers
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
Signs of Momentum for Open Banking
Around the world, these potential benefits have encouraged many regulators and industry players to start planning for Open Banking environments. For example:
- The EU's second Payment Services Directive (PSD2) has established a multi-year framework for developing open banking APIs.10 According to Accenture, nearly $1 billion was invested in PSD2-enabled services in 2016.11
- The U.K.'s Competition and Markets Authority has mandated implementation of a unified API standard, with the first phase (transaction data for large banks) due early in 2018.12
- The Australian government is assessing how open APIs should work, and Australia's four largest banks have agreed to offer customers open API access in 2018.13
- While no formal regulatory efforts are underway within the U.S., 63 percent of North American banks say "implementing Open Banking is critical to competing with new entrants – such as fintechs and tech giants," according to an Accenture survey.14
Assessing the Challenges and Obstacles
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
- When instructions arrive through a third party, how will banks verify them, check customer identities, and ensure that third-parties are complying with anti-money-laundering and anti-terrorist-financing laws?
- Will customers understand what data they are sharing, the risks they're assuming, and their rights to revoke consent?
- Will diverse market players have varying levels of controls? How will they be reviewed, audited, and held accountable?
- Will losing direct access to customer transaction and device data compromise banks' ability to detect fraud?
- How can banks and their customers prevent misuse of data once it has been shared?
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
