Created date
Jun 15, 2022 06:01 AM
Open Banking
Idea Board
Jason Ching Yuen Siu
"Open banking is the future of fintech", "the ownership of banking data should belong to the user!" and the on-and-on buzzwords are being propagated everywhere. Yet, it seems we know nothing about them and think they are cliché. In this article, I will not argue if Open banking is futuristic; but the aim is to explain :
  • What Open banking is
  • Why do we need it
  • How it works
  • How the situation is like around the world.
Before understanding what Open Banking is, I would like to give you a bit of background on traditional banking in the UK.

Background on traditional banking in the UK

For long, clients cannot get their best deals from their banks in UK due to severe inefficiency in the industry. The banking industry in the UK has been dominated by the CMA9 — the 9 largest banks, namely Barclays, Lloyds, Santander, RBS, HSBC, Danske, Bank of Ireland, Nationwide, and Allied Irish Bank. Over 90 % of the UK’s consumer and small business are their clients. So, for over 90 % of the British, their banking data is hoarded by these banks for decades.
Imagine a situation — John wanting to a plate of lasagna. He has to travel different restaurants in order to compare the prices and accept whatever plates on the table no matter how bad it is. Likewise, say when you want to get a loan, you have to look around whatever rate offered and controlled by CMA9. Therefore, these dominated banks created a market with hugely incomplete Information gaps.
The incomplete Information in a market makes the market inefficient as consumers are not paying an efficient price; hence, the industry of traditional banking domination harms the best interest of 90% of the British people.

What is Open banking?

According to The Investopedia, the definition :
Open banking is also known as "open bank data." Open banking is a banking practice that provides third-party financial service providers open access to consumer banking, transaction, and other financial data from banks and non-bank financial institutions through the use of application programming interfaces (APIs). Knowing you might ask what API is, read on and you will find it out.

Why do we need open banking?

First of all, to consumers, open banking enhances consumer experience. It gave the answer of the fundamental question — who owns your banking data? This has been a controversy but the underlying assumption for open banking is — the clients possess its data, not the banks itself.
The data is an asset which clients are entitled to share it to whoever they want. In this sense, clients normally have the right to share their banking data to the third-party financial services providers. For example, you can share your data to your asset manager of the Fintech company. They now can help you budget, find the best deals, and shop for the better products and services that suit you through the application they developed.
Second, to the traditional banking industry, open banking disruptively reshapes the competitive landscape. Let's go back to the scenario of John wanting to a plate of lasagne. Imagine now there is an application can share the real-time prices of the plate across different restaurants. He no longer needs to walk around restaurants for comparing the prices. What will happen to these restaurant owners? Likewise, what happen if there is an application to help you check all the loan rates across different banks? This forces traditional bank to offer better customer services with lower prices so as to maintain their competitive edges. Banks have to either transform digitally to or work with the third parties. This innovation allows banks to go out their comfort zones and provide more quality services in ways clients feel they are valued.

How does Open banking work ?

To develop such an application, one of the main tasks is to scrape the banking data from their clients.
Without API, before open banking, such applications built by fintech companies were not demanding due to security reason. Financial service providers used to "Screen scraping" to harvest their clients data. They had to ask for clients banking password and username, and then login on their behalf to fetch the needed data from the e-banking websites. This indirect approach has posed numerous concerns : What if username and passwords are hacked from these parties, what if these parties claim they only access a certain type of data (like deposit rates) but instead they unethically access other types (like loan rates) without letting their clients notice, what if the data they fetched is inaccurate and etc.
No worry! Here comes an open API! You can think of API as an interface created by the third-party service providers to interact with the providers' and multiple banks' servers. Many fintech companies are developing their open banking APIs because these APIs allow them to get access to their clients banking data directly without entering account credentials. There are also countless types of APIs ranging from credit card API to mortgage loan API. That means clients can choose which types of information should be shared. Therefore APIs are considered a more secure option.
Note : Open banking APIs are not without security risks, such as the potential for a malicious third-party app to clean out a customer's account. This would be an extreme (and less likely) threat. (You can read more from Investopedia )
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