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Digitalization and Open Banking are two most prominent trends in banking industry in recent time. While the former was initiated by changing customer behavior, the latter was driven by regulatory and market forces.
Open Banking is a new kid on the block with a lot of promise and fanfare, but it can present new challenges for financial services. Rather than being swayed by its exuberance, a cautious approach is required for its implementation.
What is Open Banking?
Banks employ digital and technology initiatives to remove silos, streamline processes and provide a 360-degree view of the customer at the organization level. Open Banking is broadening this vision and taking it a step further.
Until recently, banks are the sole custodian of customer financial data and access to this data was restricted to customers through bank channels. Unlocking this data and sharing it with non-banking partners has the potential to drive more competition and innovation in the financial industry and bring customers to the fore. Open Banking is an attempt to do exactly that.
At its core, Open Banking (OB) is a process of enabling banks or other financial institutions to share customer data with third-party providers (TPP) in a secure way, via application programming interfaces (APIs). Sharing of data happens only when the customer provides explicit consent to do so. It aims to provide customers greater access to, and control over, their banking data.
Sharing financial data with fintech apps is nothing new. It has been implemented using screen-scraping – a method that requires customers to share their banking credentials with a third party. However, this practice is discouraged and even restricted in certain jurisdictions as it poses a range of security risks.
Open Banking Initiatives
Different geographies are taking different approaches to implementing Open Banking.
European Union (EU) and the U.K. took a regulatory-driven approach where they enforced banks to share data through legislation such as PSD2 and GDPR. On the other hand, there is no regulatory mandate for the banks in the U.S. It has been left to the market forces to take this initiative forward.
Fraud Risks & Concerns
Sharing data is a relatively new concept for customers. Less than 20% of the customers are currently aware of open banking and are hesitant to share data due to privacy and security concerns. Even though there is no clear evidence that open banking introduces any new fraud vectors, the volume of fraud has increased, both in terms of numbers and monetary value, due to vulnerabilities exposed in the changing landscape.
In my opinion, open banking presents three major fraud risks.
Roadmap to Success
To realize the full potential of open banking, a coordinated effort is required to address issues related to security, liability, standards, governance, and communication.
Final Thoughts
Open Banking is only the beginning of the new era with ‘Open Finance’ and ‘Open Data’ next in line. If implemented correctly, it has the potential to serve diverse customer needs by providing a robust and sustainable infrastructure where innovation and competition can thrive.
The journey is full of excitement and surprise. Make sure to buckle up and wear all the protective gear to enjoy the ride!
This content is provided by an external author without editing by Finextra. It expresses the views and opinions of the author.
Alex Kreger Founder & CEO at UXDA
22 August
Nick Green Director at Purple Patch Broking Ltd
Priya Kumari
20 August
Oleg Stefanet Chief Risk Officer at payabl.
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