Open Banking 101
17 Nis 2023
2 dk okuma süresi
Open banking pertains to obtaining obfuscated consumer financial data to grant safe third-party admission to financial technology (fintech) developers and banking institutions. This is accomplished by leveraging financial data open application programming interfaces (APIs) to provide access to duly-regulated open banking service providers.
Open banking aims to propel the development of fintech products, amplify the competition among banking institutions, streamline funds transfers, and diminish consumer expenses, all in a manner comparable to digital banking platform software.
What is open banking?
Open banking refers to sharing bank data through an API to promote the development of applications and financial products while encouraging competition among smaller banks to benefit the consumer. The concept was first introduced in 2015, coinciding with the second Payment Services Directive (PSD2) launch in Europe.
Financial data as an asset
The open banking concept changed how banks perceived their customers' data from being stewards of the data to considering it a valuable asset.
Open banking may appear to be a negative for banks or even an unnecessary policy with no clear benefit. After all, why would the government mandate the opening up of secure financial data to promote competition? This seems like a market disruptor that would be unwanted by industry incumbents.
However, the reality is that before the advent of open banking, banks did not view their datasets as valuable assets. With the advent of open banking, financial institutions have started to reframe how they think about their data and begun to take advantage of both their own and other banks' data. By properly leveraging open banking, a bank can offer better customer service, improved financial products, and lower service costs. Through deep dives into vast financial data sets - be they their own or others' - a bank can identify consumer needs and create products to meet them.
Banks that move quickly and leverage the data from open APIs can gain a first-to-market advantage by offering new financial products created from the insights gained through those APIs.
Improving the banking experience
Open banking aims to enhance the banking experience for customers by providing open datasets that enable smaller banks to offer customized consumer products based on their needs and preferences. Fintech providers can also leverage the same open APIs and data sets to create complementary products that augment the services offered by traditional banks. These APIs are accessible to banks and fintech providers, fostering the development of innovative apps and financial solutions.
Open banking and fintech apps
The open banking directive's other goal was promoting the development of fintech applications. Fintech can leverage vast amounts of financial data, including transaction records and payment requests, to develop applications that cater to consumer needs.
By analyzing the data, fintech can identify emerging consumer trends and create innovative products accordingly. While the potential benefits of open banking are immense, it may take time for fintech to fully exploit this opportunity due to factors such as consumer apathy, lack of awareness about open banking, and the time it takes for fintech to analyze the data and develop relevant applications.
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