what-is-open-banking

Some innovations come along and transform an entire landscape. eBay came and kicked “Classifieds” out of the newspaper. Apple revolutionized the mobile phone and changed how we connect and communicate. One innovation is changing how we experience money, and it’s reshaping financial services: open banking.

At its core, open banking is a philosophy–one centered on empowering the consumer even as it elevates the businesses that integrate its capabilities. Here’s your introduction to open banking and a glimpse into how it’s already benefiting both consumers and financial service providers.

What Is Open Banking? 

There are many aspects to open banking and you’re likely to find differing definitions depending on market and geography. But in its simplest form, open banking is empowering consumers to access, use, and benefit from their financial data. Enterprises leverage their big data to big effect. So why can’t individuals, families, and small businesses do the same? 

So what does this look like in practice? Open banking platforms require the use of an open application programming interface (API) that enables third-parties to connect to financial institutions and access a consumer’s banking, transaction history, and other financial data. To access that data, however, the consumer must give explicit consent to authorize the connection between the financial institution and the third party. This process is often called “permissioning.” Once a consumer permissions access to their data, the third party can access that data and the consumer can benefit from the third party’s services.

While there are variabilities in the technical implementation of open banking, its foundation is a secure environment in which financial data can be shared between parties, and where the consumer has the ability to control access to that data. In order to give the consumer the greatest control and security, the industry is moving toward more “tokenized” access, also known as “Open Authorization” or “oAuth” connections. oAuth connections involve providing a third party with a “token,” as opposed to the consumer’s credentials, to finalize the connection between the consumer and the third party.

Open Banking Is Consumer-Centric

Making the consumers the gatekeeper to their data empowers them with control over who has access to their financial data and what aspects of their financial data they want to share, as well as awareness of what the data is being shared for. What if, after permissioning, the consumer decides they don’t want the third party to access their data any longer? They can revoke their consent at any time. The control is always in the hands of the consumer.

Accelerating these benefits are direct data agreements (sometimes called data access agreements). These agreements define common rules for how the two parties communicate and exchange financial data – they typically include the data source, typically a bank, a data recipient, and a financial data aggregator. Not only is this the most secure way to access financial data, but it also builds a more convenient and streamlined financial services process, a process that benefits both consumers and financial service providers.

Consumer-centric technology and the goal to empower consumers come together to make open banking a platform for financial services innovation. When the consumer owns their data, and is empowered by that ownership, everyone wins.

Why Do We Need Open Banking?

We’re living in a hyper-connected world, yet consumers feel disconnected from what’s happening with their data. Yes, their data is scattered in silos across the web. But they don’t have a sense of ownership or control over it. And they’re not benefiting from it as much as they could.

Open banking is not just focusing on going digital. And it’s not simply creating a better experience. It’s about experiences that empower the consumer. Experiences that engage, expand, and enlighten. Experiences that put the consumer at the center. Engaging experiences where the consumer feels like an active participant. They feel fully connected. Through expanded control and increased access to their personal financial data, consumers will have more financial opportunity and possibilities not previously had or seen. From enlightenment comes understanding and rich insights. Simply put, consumers increase their financial literacy. This will lead to better financial decisions and outcomes.

Open Banking and Empowering Outcomes

Open banking platforms founded on consumer empowerment of course benefit the consumer, but they also elevate the financial service providers that access the permissioned data. 

Open Banking and Consumers

Streamlined Experiences

Open banking streamlines financial experiences by simplifying how consumers engage with their financial data. For example, open banking powers convenient peer-to-peer payment and personal financial management apps. These solutions simplify financial experiences as well as empower consumers with actionable insights for improving their financial health.

Accessing consumer data also reduces the paper-chasing and back-and-forth of traditional account opening, payments or lending and provides solutions that feel at home in consumers’ digital lifestyles. What used to take too much time digging through old files, now takes a few minutes and a simple permissioning experience. Everyone saves time–and patience.

Increased Transparency and Security

Open banking empowers consumers by enabling greater security and transparency. Thanks to the emergence of reliable, secure open API connections, consumers will access dashboards where they can review, enable, and disable data sharing connections. More transparency means that consumers stay more informed and can always have both hands on the data-sharing steering wheel. And when direct data agreements rely on secure oAuth technology, third parties access your financial data using a “token” that replaces login credentials. More security. Less hassle.

Greater Financial Inclusion

Open banking and direct data agreements do more than deliver secure convenience: open banking also expands access to credit and increases financial inclusion. Secure connections to financial data enables more credit access for the approximately 53 million U.S. consumers with a thin to non-existent credit file. With this expanded access, open banking supplements the traditional credit score to enable inclusion.

Improved Financial Literacy

With a clearer understanding of their financial health, consumers can improve their financial literacy and be empowered to make better financial decisions. Thanks to the transparency offered by open banking, financial data is no longer a mystery, but a tool for improving quality of life.

Open Banking and Financial Service Providers

Improved Consumer Loyalty

When financial service providers leverage open banking’s capabilities to build consumer-centric experiences, they improve loyalty between their brand and their customers. After all, empowering experiences do more than simply provide a one-time financial service; they enable consumers to improve their financial health. Why would a consumer go to a less consumer-centric, less secure, less innovative provider when they have your empowering, secure, and convenient open-banking-powered experience? Open banking and its accompanying data access also enable providers to continually respond to customer needs and innovate with new services or curate other services that will only further satisfy consumers and improve loyalty.

More Detailed Decisioning

Open banking reduces risk even further by delivering the most accurate real-time data. Data accessed through open banking platforms delivers detailed insights into a borrower’s financial story, providing access to even held-away accounts and complex analytics, like cash flow. A comprehensive financial picture thanks to accurate, real-time data leads to lower risk, better decisioning, and better returns for financial service providers.

Greater Agility

In a dynamic time for financial services (see, well, all of 2020), open banking also enables financial service providers to be more agile and adapt quickly to challenges. Digital solutions powered by open banking platforms require less time, less friction with consumers, and don’t shut down just because a pandemic washes through. These open banking capabilities give organizations the agility to adapt to challenges and continue serving customers.

Streamlined consumer experiences. Lower risk. Better decisioning. All of these lead to higher ROI for financial service providers. Like we said: everyone wins.

How Finicity Is Leveraging Open Banking to Empower Consumers and Providers

Finicity has always been determined to help consumers improve their financial health. Open banking is simply the best way to do that, regardless of where the consumer is in their financial journey. To keep the consumer in focus, our approach to open banking is guided by five core principles

  1. Control: the consumer should have control over how, where, and for how long their financial data is used.
  2. Access: the consumer should have access to their financial data at all times and across all account types.
  3. Transparency: third parties should be transparent about how they are using a consumer’s financial data.
  4. Traceability: consumers should be able to trace how their data is being used and dispute records. 
  5. Security: the consumer’s financial data should always be protected with secure connections and trustworthy parties.

Our open banking platform is built on our industry leadership in connectivity, data quality, and data intelligence. With connections to over 10,000 financial institutions, Finicity covers over 95% of the U.S. market. Remember those most-secure oAuth connections? Finicity leads the market in oAuth connections to most of the largest financial institutions in the nation. This all means more secure connections for more consumers and more service providers.

Getting the most out of open banking requires more than access to data. That’s why Finicity has built intelligence and deep learning into our analytics layer. That layer offers superior cleaning and categorization along with actionable insights like scoring, verifications, cashflow and more. Plus, we make it easy for businesses to integrate our platform into their workflow.

The open banking transformation may still be in its early innings, but it’s already changing the way we experience money and serve consumers. Check out open banking in action with our data solutions, which put the consumer behind the wheel of their financial health and lead financial service providers to better results.

Other Resources on Open Banking: 

American Banker: Open banking will bring banks and fintechs together

MuleSoft: How Financial Service Firms Can Benefit from Open Banking APIs

LendIt: The COVID Effect: Typical Credit Risk Data Became Obsolete Overnight. How Can Open Banking Fix it?

PwC: Open banking: US is next

American Banker: It’s time to go all-in on open banking

Finicity: How Open Banking Is Reshaping Creditworthiness

Deloitte: Executing the open banking strategy in the United States