Open Banking: Everything You Need To Know

Open banking has changed the way we conduct financial transactions and monitor our personal finances. Whether you check your credit score through your online bank account or use a budgeting app to track your spending, you’re likely already using open banking without even knowing it.

As businesses, banks, and consumers discover the many benefits of open banking, government entities have also started creating regulatory standards to ensure safe and reliable processes. Many financial institutions across the globe have redesigned systems that allow consumers greater control over their personal financial data.

Read our guide to open banking below to learn about how open banking works, the benefits of open banking, how different countries are regulating the new systems, and how open banking allows for more convenient real time payments.

What Is Open Banking?

Open banking allows consumers to share their personal banking data with other financial institutions or third-party providers. It is primarily used with fintech apps, such as Robinhood, Mint, or Acorns. Consumers might share information such as account types, transaction data, account balances, or payment methods and details.

With traditional banking, only the account owner and the bank can access this data. However, open banking allows consumers to give a third party access to create a more seamless experience when comparing new financial products, shopping, investing, or simply reviewing their day-to-day budgets.

Key Principles of Open Banking

Open banking has some key principles that help make up the technical part of the system, plus other features that make it safe and accessible for consumers.

Consumer Control and Consent

One of the primary benefits of open banking (discussed in more detail below) is that it allows consumers to have greater control over their personal financial data. Account servicing payment service providers (ASPSPs) and other third-party providers need to get consent from users before accessing their financial data. In cases where the user does not have the option to give consent, others could access their data without authorization and use it fraudulently.

When financial institutions and third parties obtain consent, they must advise consumers regarding what information is being shared, who it is being shared with, and how the information is being used. Consumers should also have the option to opt out of sharing their information, and the option to revoke consent at any time, which gives them greater control of their personal financial data.

Secure and Reliable Access

Any institutions participating in open banking must meet specific security requirements, and some countries require that providers register with an industry regulator.

Data is accessed through secure application programming interfaces (APIs), which allow software from various companies to connect and transmit data. The open banking industry is also working on creating a token-based system, where a consumer’s account information would be coded (or tokenized) to protect against security breaches.

Transparency and Non-Discrimination

Many aspects of open banking require that banks and other financial institutions become more transparent with their customers’ data and how they use it. With traditional banking, many institutions are reluctant to share consumer data that would allow competitors to create financial offerings that might draw customers to another bank. However, this mindset is what limits the creation of customer-friendly products.

Open banking allows other institutions to access data with the customer’s consent, which also lets them create competitive products. Not only does the customer have complete knowledge of how their data is being used, but they can also receive recommendations for relevant financial products that become more widely available to a wide range of customers.

Data Portability

Data portability is the capability to move data from one location to another. With traditional banking, financial institutions store data so that it is not accessible to other parties. On the other hand, open banking requires that participants store data in ways that allow consumers and other third parties to easily access necessary data.

Therefore, organizations that use open banking need to design systems so that they can transmit and receive data in a structured, commonly used, and machine-readable format, according to General Data Protection Regulation (GDPR) standards.

Benefits of Open Banking

When implemented correctly, open banking can have many benefits for consumers, and it can help to further the financial industry. Take a look at some details below to learn about why open banking is advantageous.

Enhanced Customer Experience and Convenience

Open banking allows consumers to link their bank accounts and other financial data to various applications, which introduces convenience in the process of managing finances. Instead of logging into multiple online accounts, you can access your essential account data in one place. This can make it easier to take control of your finances through budgeting, reviewing your credit scores or reports, or exploring new financial products.

In addition, open banking allows consumers to make instant payments and fund transfers without switching between shopping and payment apps. Traditional payment methods might include entering debit or credit card information, whereas open banking payment technology is more similar to bank transfers that typically happen in real time. This often results in faster payments that can reduce fraud with Strong Customer Authentication (SCA) which requires explicit payment consent.

Increased Innovation and Competition in the Financial Industry

While traditional banks have often resisted changing their financial products, open banking is a technology for the modern world that has created a better environment for innovation and creativity with many new offerings. Open banking also allows banks to put more technical twists on current products that make them more convenient for customers.

Fintechs have been some of the biggest threats to banks and other financial institutions in recent years. However, open banking makes it possible for banks to partner with these newcomers who have built innovative financial products. For example, banks may choose to partner with a fintech that allows consumers to view their credit information, rather than taking the time and resources to build a tool themselves.

As banks use open banking to create more functional, customer-friendly products, they will have the opportunity to grow their revenue and improve customer retention rates. It creates a new landscape for personal finance products that improve chances for success amongst heavy competition.

Increased Consumer Control Over Their Financial Data

Open banking regulations are often aimed at giving consumers greater control over their personal financial data. When you use products with open banking, you must give concrete consent to share your data. The service provider must provide information that states what information is being shared, how and why it’s being shared, and who can access the data.

You can choose to opt out of open banking if you are not comfortable sharing your information, and you may give consent and then revoke it at a later date. Therefore, you have a greater ability to control who accesses your data and whether digital payments are being processed.

How Open Banking and Real Time Payments Work Together

Open banking makes it possible for fintechs and payment platforms to access participating banks’ APIs, which allows organizations to tailor their products for each bank. Payment APIs are especially useful to consumers because they are easily accessible, and they expand the options for various payment methods. Real time payment systems can utilize open banking to allow customers to receive or send instant funds.

Before the introduction of open banking, customers needed to search for a financial institution that chose to offer real time (RTP) payments, which was inconvenient for those who already had accounts open with banks that chose not to offer the service. Now, fintechs that operate on the real time payment network could potentially connect to any bank, eliminating the need to search for or switch banks.

When customers use open banking for real time payments, which is essentially an instant bank account transfer, there is no need for debit or credit card numbers that may get passed through payment gateways and other middlemen. This enhances security and provides greater control over who can access their bank account funds.

Key Regulations and Standards Governing Open Banking Globally

Open banking is regulated by various government entities around the world to ensure that consumers’ financial data is accessible but safe. Below are some of the current and upcoming leaders in the open banking movement.

Europe and United Kingdom

The Payment Services Directive is a law that was originally passed in 2007 and updated in 2015. The updated version is known as PSD2, which was implemented in various EU member states through Payment Services Regulations (PSRs).

The PSRs require that banks make it possible to share consumer data with the accountholder’s consent. Since it doesn’t give additional requirements for how to conduct open banking, the Competition and Markets Authority (CMA) created additional regulations for the UK’s nine largest banks, known as the CMA9. The regulations mandated that the banks build APIs, and they were later expanded into the Open Banking Standard set by the Open Banking Implementation Entity (OBIE).

The Financial Conduct Authority (FCA) now uses these standards and regulations to regulate open banking in the EU, while the Central Bank of Ireland regulates open banking in Ireland.

Australia

The Australian Competition and Consumer Commission (ACCC) and Office of the Australian Information Commissioner (OAIC) are responsible for enforcing open banking regulations set by the Consumer Data Right (CDR), which mandates APIs that allow consumers to safely and reliably connect their financial data to third parties. The CDR also regulates consumer data in other sectors and industries, such as energy and telecommunications.

Japan

The Revision of the Banking Act was amended in 2018 to promote open banking, which required Japanese banks to build APIs for open banking within two years. The Financial Services Agency (FSA) and the Bank of Japan are responsible for enforcing regulations and maintaining the registry of electronic payment service providers and other third parties.

Canada

Open banking is not currently available nor regulated in Canada. However, the country appointed an Advisory Committee in 2018 to conduct a review and decide how best to safely implement open banking. As of March 2022, Abraham Tachjian was appointed to lead the development of an open banking framework by first consulting with industry regulators and consumer representatives.

United States

The Consumer Financial Protection Bureau (CFPB) regulates open banking in the United States. It is currently working to formalize an unused legal authority that was originally enacted in 2010, which gives consumers more rights concerning their personal financial data. The CFPB expects to finalize its formal rules and proposal in 2024.

Transition to the New Age of Payment Tech

Any business that accepts online payments can stand to benefit from open banking. Consumers are on the lookout for more secure payment types, and real time payments with open banking offer an effective solution that can easily be worked into a company’s payment choreography.

When completing real-time payments, businesses must send a payment request to the customer. When the customer is ready to make their payment, they are connected to their bank account where they manually approve the payment. Funds are typically transferred instantly, which makes it easier for both the business and the customer to manage cash flows.

Happier customers mean more repeat business. You may see other advantages as well, such as lower payment processing fees and higher payment success rates, since there are fewer steps and third parties involved in processing these payments.

Revolv3 offers a modern payment platform that can further your success rates even more through dynamic routing that finds the most efficient way through a network. In addition, Revolv3 only charges businesses for successful payments. Whether you’re a small business scaling or a large enterprise, Revolv3 can help you process real time payments as well as other payment methods. Contact us today to request a demo.