What Is Open Banking? Everything You Need to Know

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At this point in your life as a consumer, you’re accustomed to having less privacy than you used to. Technology in financial products makes your life easier in myriad ways, but also far less private.

Your financial data and account information are no exception. In the fintech and banking industry, where financial services intersect with technology, new products roll out all the time. Whether it is robo-advisors that oversee your investment portfolios for nominal fees or third-party payment services like PayPal, Venmo and Zelle, open banking is one of the trends making such innovation possible.

What Is Open Banking?

In the spirit of innovation, some banks are beginning to give third parties access to financial information — this is called open banking. It encourages the kind of technological development that, in the end, makes life easier for customers. Banks open their application programming interfaces, and third-party developers gain access to financial information and how it’s structured so that they can design new apps and interfaces.

How Common Is Open Banking?

Countries around the world are in the midst of experimenting with or migrating to a strategy that includes the option for open banking. Regulatory environments differ, but a widespread desire to move in the more competitive direction that open banking allows for is now commonplace, especially in the United States.

What Is an Open Banking API?

An application programming interface, or API, is basically a guidebook full of directions about how various aspects of software should interact with each other. This can range from banking apps to savings accounts or other bank accounts to credit cards, and so on.

Banks have been using APIs for a long time. Many of the products you use as a consumer rely on them, from software that helps you manage your personal finances to the level of detail you see about your accounts when you log into your bank’s website. Software developers also use APIs to connect payment networks like Visa and Mastercard to your transactions.

Open Banking Pros and Cons

Open banking is essentially an invitation to third-party developers. It’s the equivalent of inviting a guest to dinner — the guest must respect your environment and will ideally bring something to the party.

However, account aggregation and consumer privacy is the biggest concern as more banks turn to open banking. Third-party developers are most effective at building innovative APIs when they’re working with real customer information, so banks must participate in the process by sharing data.

Pros

• More bank innovation to stay competitive with products and services
• Improves customer service through ease of use and a variety of ways to exchange money
• Supplies a better understanding of your finances overall

Cons

• Data sharing from financial institutions could breach customer privacy and account information.
• Account aggregation could lead to easier security breaches.

Is Consumer Information Protected?

U.S. banks tend to exert tight control over how your information is shared with third parties. It is generally understood, industry-wide, that consumers need protections in place. It is also inherent that you, as a consumer, need to understand how your financial information is being used and by whom.

The best thing you can do to be a savvy consumer is to recognize that the financial services industry is in transition. As banks’ reliance on technology increases, third-party developers could play a larger role in introducing new products and services.

You can bet that industry regulations will change to try and address this shift and put important protections in place for consumers. You can also bet that there will be considerable outreach and education to try and keep banks and consumers on the same page.

Are Other Industries Doing This?

Banks are not the first businesses to open their APIs to third-party developers. The practice is common in software and web development.

Yahoo, for example, has long hosted an open “hack day” during which the public is invited to suggest programming upgrades to the Yahoo API and other Yahoo-owned products. Google and Foursquare have held similar events, as well.

Final Take

No matter how or when open banking rolls out more fully, it appears to be the new standard of practice. Banks are only facing more competition over time, and open bank data versus transaction data will be at the forefront of that journey. By inviting more guests to the party, they can better hope to ensure the kind of innovation and data-sharing protocol customers have come to expect.

Kelli Francis contributed to the reporting for this article.

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