You know that major feature of blockchain technology? The one that cuts out the intermediaries and drives down the fees? Open banking is like fintech’s solution to that. If your bank is involved in open banking, it means that it’s part of a network of financial institutions. And between these institutions, your data is shared securely through APIs that let you interact with your preferred application rather than your bank.
According to Steve Lemon, co-founder and Head of Corporate Development at Currencycloud, a Google-backed cross-border payments platform, “Open banking is about opening up access to an individual’s bank account so that individual can access and utilize the functionality of their bank account through another application. It’s a bit like using your Facebook account to log in to a news site.”
Open banking is basically an initiative to open up the banks and leverage the utility of the services they provide. Lemon explains:
“If you want to access payment networks, or provide facilities where you hold funds for a customer or execute payments from one person to another, effectively you have to be a bank to provide that service. And the services the banks provide are behind a walled garden. You have no choice but to do it in a bank. In the branch, online, or in an app.”
Until now.
So, Open Banking Is a Good Thing?
While it sounds a little frightening having your financial data opened up and flying around the stratosphere, the opposite is actually true. It’s bringing the ownership of the data back to you, the customer. Historically, only the banks have had access to your data and transactions.
Lemon comments, “The Holy Grail of data is transactional data, basket data from merchants, and geolocation data from telcos – and I think we may well see those things opened up as well.”
Moreover, open banking can help to make your data more secure. “Post-financial crisis, the regulators have recognized that society has a huge systemic risk in being so very exposed to such a small number of entities. The idea of open banking is it recognizes there is this new thing called fintech that is doing more to put the customer first.”
Let’s Take a Couple of Use Cases
If you’re still coming around to the concept, let’s look at a couple of examples. Say your preferred payment method is PayPal. Currently, you still have to interact with your bank in order to interact with PayPal. Opening banking would allow PayPal to interact on your behalf, cutting out a step and making transactions more convenient.
And here’s another. Lemon questions, “Would you give Amazon permission to access your bank and look at your transaction data to see what you’ve been spending on and to make payments on your behalf?”
When you put it like that, most people would say, “No way!” But if you give them the context and appropriate use case, the response will probably be different.
“When you use Amazon, you pay with a credit card and they pay a fee to the credit card company. If you put your bank details there and allow Amazon to pay, they may be able to give you a discount.”
Would you do it now?
Open Banking – Final Thoughts
There are a few barriers to open banking, not least widespread acceptance and cost. And of course, the incumbent banks who don’t necessarily want to rescind control of their services. But just as banks tremble in the tidal wave of fintech and the growing rise of crypto, those that move with the times will be the winners in the race.
“If you’re a bank, you might as well get on board now, disrupt yourself before you get disrupted by the competition. We’re seeing a lot of adoption especially in Asia, where the banks are a lot more forward-thinking in terms of the collaborative opportunities that open banking affords.”
Think about it this way. You have huge banks that are offering thousands of acceptable-to-mediocre services. And you have thousands of fintech providers that are excellent at the one service they offer. Collaborating can only be a good thing, or as Lemon concludes, “the whole will be greater than the sum of the separate parts.”