Table of Contents
Open Banking: What It Is and How It Works
Open banking is the ability of banks and other financial institutions and third party providers to share financial services products and information through open application programming interfaces (APIs). This means that consumers and business owners can easily manage their finances and have all their financial institutions’ information in one place. This is a concept that is currently gaining popularity especially because of the advantages it offers to consumers and businesses. A consumer is supposed to own their financial data and thus third party providers should be allowed to access this data in order to offer various useful services such as budgeting, advice on investment and where to get a loan. On the other side, firms can leverage this data to enhance customer experience by offering product and services that are relevant to the needs of the customer.
The Opportunities of Open Banking for the Consumer and the Firm
A major advantage of this is that it brings inconveniences that were earlier associated with banking. It also means that people get to see other products that are of interest to them based on their spending behavior. This is a great chance for firms to come up with new income generating products and services that are more suitable to customer needs than the traditional systems. In addition, it can help reduce the costs of some traditional functions such as credit checks or account balance verification. Security is another highlight; by using secure APIs, the sensitive information remains secure and is accessible only to the permitted entities.
How to Use Open Banking as a Consumer: A Step by Step Guide
To begin with, open banking as a consumer is to identify a provider that offers the service. There are many of them available, including mobile applications Yolt or Money Dashboard for the analysis of all accounts, expenses tracking services such as Emma, or investment advice from Nutmeg.
After choosing a provider, it is usually necessary to link your bank accounts. This process requires the client to log into their online banking account and grant the third party provider access to their information through an API. This enables the consumer to start receiving the services that the provider has to offer.
It is important to understand that all open banking providers are supervised by organizations such as the Financial Conduct Authority in the United Kingdom or the European Banking Authority. This means that they have to meet very high security standards and data protection policies.
How Businesses Can Benefit from Open Banking to Improve Customer Engagement and Growth
From a business perspective, open banking creates many chances for growth and creativity. With the help of customer data, companies can create new and unique products and services that are closer to the consumer’s needs than the classic ones.
Let’s take credit scoring as an example. The conventional approaches are based on basic factors such as income or credit report which are not very accurate in determining the credit risk of an client. Open banking enables the lenders to view real time transactional information of the customer which gives a more accurate picture of the financial health of the customer and thus makes the lending decisions better.
Payment processing is another area that firms can also explore. Payment service providers can offer faster and cheaper transactions without compromising on security by using the APIs which are provided by the banks.
In conclusion, open banking has great benefits for both consumers and firms. Consumers get simplicity, security, and personalized services and products, while firms get new revenue streams through the development of new products and services based on customer data analyzed through safe APIs provided by banks. Therefore, it is safe to predict that more of these practices will be used in the future as technology continues to advance at a fast rate, so that everyone across the world can better manage their finances.
