Open banking, a phenomenon that has grown in relevance across the global financial services ecosystem, is not new. In fact, the inception of open banking stems back to 1983, where the Deutsche Bundespost, a German state-run postal service and telecommunications business, piloted a program with a select group of consumers. The program enabled them to initiate money transfers via telephone from the comfort of their homes, greatly improving the banking experience.
Open banking has made significant advancements since then, but the intent remains the same. Non-banks are continuously innovating in an effort to democratize financial services and drive efficiencies for consumers, financial institutions, businesses, FinTechs, and regulators alike.
So what exactly is open banking and how did we get here?
What is open banking?
In its current form, open banking allows third parties to access consumer banking data via Application Programming Interfaces (APIs) to develop new applications and provide better services to consumers. There are several market drivers that have accelerated this innovation across countless use cases. In fact, many of you likely use products or services on a daily basis that are enabled by open banking without even realizing it.
How does open banking work?
Providing third parties access to consumer banking data, with consumer permission, is a far safer and more secure method of exposing data relative to historical iterations. Prior to open banking, sharing consumer banking data was typically done via screen-scraping, a much higher risk method that leaves customers’ personally identifiable information (PII) susceptible to fraudulent actors. As a result, open banking enables greater privacy and security for both financial institutions and consumers.
Open banking on the rise
There are several trends that have enabled the rapid shift and acceptance of open banking. These trends include:
Evolving customer expectations: The ‘Amazon Effect’ has drastically changed the expectations that consumers demand when it comes to accessibility, speed, and convenience. The ongoing digitization of all industries, including financial services, has only been exacerbated by the existing COVID-19 environment.
Prevalence of FinTechs: Technology companies that want to simplify and provide greater transparency in financial services are constantly emerging. This too has been accelerated by the current pandemic - Robinhood’s remarkable growth as of late is a prime example of this.
Shifting regulatory environment: The landmark PSD2 legislation in Europe has required banks to share permissible consumer financial data with non-banks. The innovation and competition inspired by this directive has been echoed across the globe.