First things first, what is open banking? In its absolute essence: Open Banking is forcing the traditional, big banks to share their API:s (fancy acronym for Application Programming Interface which, in turn, is just geek for “that thing that will help you get relevant data from a third party”) with everyone that wanted to build a cool financial service of their own.
If we wade out a little further into the pool, still keeping our feet firmly on the bottom and our head well above water, it’s useful to see Open banking as “the practice of sharing financial information electronically, securely, and only under conditions that customers approve of”. What does that mean then? Well, the first two are rather self explanatory (if vague) but it’s the third point that’s really interesting. To know why we need to take a quick detour and talk about “screen scraping”. Don’t worry, it won’t take long.
Ok, so the thing about screen scraping is that you had to use the same username and password as when you log in to your bank account. No biggie when using the plethora of digital identification apps out there, but the real crux of the matter came after. Once you’ve logged in, the app would have all your bank info at its disposal and from that it would be free to pick and choose the information it needed. To put it into context: this is basically the same thing as going in to a store and when paying you just hand over the keys to your apartment and tell the perfectly nice guy or girl behind the counter that they can run on over and fetch what they need. Hopefully, they’ll find your wallet or some cash — and hopefully they won’t rummage through your stuff. If we ignore the glaring security issues for a moment and focus on the poor clerk and what they are going through: instead of getting exactly the information that they need, they have to search high and low, try to figure out which drawer might be of interest and which might be a waste of time. And what if you move? Then they have to learn a completely new layout. API:s on the other hand is more akin to this conversation: Clerk: “How do you want to pay?” You: “With this bank account please.” Clerk: “Perfect! Enjoy you day!”
You may already use services that take advantage of open banking — PFM tools like Minna and Tink use your bank account information to help you track spending and reach other goals. While payments focused companies like Zimpler helps connect businesses with their end users so they can make transactions between each other instantaneously.
Open banking is a big deal for banks, regulators, and third-party providers. And consumers will soon have more options for managing payments, loans, and investments.
Banks can benefit greatly by teaming up with fintechs to improve their own offer. We’ve written a whole thing about the perks of open banking for banks, but the TL;DR version is that they can connect to newer and fresher technology without having to build PFM services themselves.
Brace yourself, third-party tools are coming! App developers will be able to develop much quicker with access to open API’s and Expect to see more third-party tools working with personalized financial management. Get together and improvise! How knows what you might come up with?
Getting or refinancing a loan may become easier. Instead of manually gathering information from a bunch of various sources and provide it to the lender, you can grant access so they can just fetch what they need directly. Same goes for business loans.
Integrated systems can automatically check for when you send or receive payments. Which means less manual work when preparing your taxes. Also, cost cutting!
Payments are a substantial piece of European open banking regulation. Under the European Commission’s Second Payment Services Directive (PSD2), banks must allow third-parties to initiate payments on your behalf. This is nothing new, there’s plenty of non-bank products out there that you have probably used. But rising stars as, oh, I don’t know, Zimpler that are built specifically with Open Banking and PSD2 in mind will be able to offer instant, totally secure payments all day every day for end users, banks and business owners.
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