Open Banking: data portability, greater transparency and competitive advantages are heading your way – are you ready?

Several features of open banking are already here. Understand what’s involved and how you can get a handle on the future of banking.

FinLync | June 10, 2022

There are few innovations that come along that completely change the industry landscape, but when they do it’s impossible to deny the impact. Open Banking is one such innovation. It is enabling connections, changing the way financial institutions and corporates process transactions, and all while driving transparency, security and convenience.

What is Open Banking?

Open banking refers to the ability of banks to provide standard processes by which bank information can be retrieved by consumers and third parties for easy digital access to their financial data via authorized non-bank platforms. More specifically, it refers to the use of open APIs that enable third-party developers to build applications and services specific to a financial institution to help them meet open banking requirements by providing a new level of access to financial data. This includes being able to download and share information about account balances, payments, transactions and investments.

Why is open banking important?

In a nutshell, open banking delivers on the promise of a more holistic view of all financial data without the need to separately access multiple banking platforms – and then allows that holistic view to be turned into direct action. As the industry shifts to more data-driven solutions and open-banking-driven platforms, open banking, which uses Application Programming Interfaces (APIs) to gain access to financial data, is spurring unparalleled levels of innovation that create the ability to share data across banks, consumers, financial institutions, and third-party service providers.

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Who plays what roles in Open Banking?

There are four key players in opening banking:

  1. The Consumer
    The consumer is the owner of the data and the authorizer of any data exchanges.
  2. The Bank
    The bank, which collects and houses all the information, is the main provider of the data.
  3. Corporate Treasuries
    Extends the ability of corporate treasuries, regardless of size, to take advantage of a new technology that improves cash visibility, payments, reconciliation
  4. The FinTech solution provider
    The FinTech solution provider, using API technology, integrates and aggregates multiple banks, financial institutions, lenders, brokerages, financial advisers, credit card and other financial businesses in a single location, giving users control of all their data in a single location to make better financial decisions and share consumer data when situations arise.

Key Benefits-why open banking?

Open banking ensures consumers have the ability to see all their assets (bank and investment balances) right alongside their liabilities (mortgage, car loan, credit cards, rent, etc.) at any point in time in a single place. This allows for easy visibility into near term and medium-term financial health and helps to ensure no avoidable overdrafts occur.

Additionally, open banking allows for endless possibilities for providing information, including:

  • Full picture of finances can be shared easily for large purchases like home loans
  • Bridge loans can be both easier to get and at a more favorable rate if consumers can easily share financial information with numerous finance companies providing both a higher likelihood of success and a competitive environment likely to result in a more favorable rate to the consumer
  • Investment advisors can make recommendations based off up to date and accurate information

How do bank APIs enable open banking?

Banks are required to use an open banking API standard format regulated by banking regulators, which ensures combining data across multiple banks is not an impossible task and also makes moving banks easier. This allows Fintech companies to easily aggregate information from multiple banks using this single format.

Bank APIs are a digital channel that represent the fastest and most secure way for a company to connect to a bank. In a nutshell, they establish a direct connection between the bank and the corporation’s system, typically an ERP system. As such, bank APIs make processes and workflows more independent, as no intermediary is needed between the corporate and the bank. Bank APIs also make treasury activities easier and more streamlined by simplifying the movement of money.

Compared to traditional types of bank connectivity, bank APIs provide faster and more nimble connections. As well as speeding up the treasury team’s access to data, bank APIs also enable companies to access richer data that supports more informed decision-making and the broader ability of having an open banking platform.

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The key benefits for corporates include:

  • Enables real-time access to information. By using bank APIs, treasuries can access the data they need on-demand from their banks as soon as they need it, instead of having to wait for information to arrive on a pre-agreed scheduled. What’s more, the data they receive is fully up-to-date, rather than stale. They can also refresh their data as often as they like. This means treasury teams can make more accurate decisions based on current information.
  • Provides greater transparency. Access to real-time data drives greater transparency – for example, the treasury team can use bank APIs to visualize whether they have enough cash before releasing a payment, without having to spend time accessing multiple systems.
  • Streamlines administrative tasks. Manual and repetitive tasks can be automated, resulting in a better user experience and reducing the associated costs. For example, eliminating the need for middleware means there are fewer barriers between the treasury team and the information they need to access. There’s also no need to reference multiple screens when seeking information, as everything you need is in one place. As a result of these efficiencies, the treasury team’s time is freed up to focus on value-adding analysis, rather than being wasted on manual tasks.
  • Supports richer data. By using bank APIs, companies may be able to take advantage of richer data, including internal reference information and vendor information. This can drive multiple benefits. For one thing, it can enable companies to reduce the number of payments rejected by the bank. When it comes to reconciling the bank’s transaction records with the company’s records, richer data can also help companies streamline and automate the reconciliation process, reducing the number of exceptions that need to be investigated.
  • Reduces fraud risk. The security offered by bank APIs means the risk of fraud is significantly reduced. For one thing, it’s easier to spot potential fraud when you have an audit trail tracking changes to payment information. API connectivity also reduces the number of hands that touch any payment – and the risk of fraud can also be mitigated by the use of OAuth 2.0, the industry-standard protocol for authentication, which uses secure tokens rather than traditional login credentials.

 

In short, bank API connectivity means that treasury teams can be more confident that the information they receive is accurate and up-to-date, while benefiting from robust security measures. This, in turn, provides an opportunity to speed up treasury processes, improve reconciliation and manage fraud risk more effectively. Companies can also gain an advantage over their competitors, as well as increasing their appeal when seeking to attract and retain top industry talent.

Who are the big winners in open banking?

Creating competition within finance always benefits the consumer, so they are the big winners in open banking. If banks and lenders know that borrowing from another lender or bank will be no more effort from the consumer side than a consumer’s primary bank, this puts all banks on equal footing and gives consumers the true power to choose with convenience no longer being weighed against cost as a key factor in decision making.

But there is no denying that banks and corporates are also big winners because the transformative nature of open banking, and the APIs that enable it, is creating an environment that is bringing a new level of innovation and nimbleness to financial services that hasn’t been seen in decades.

 

 

Essential Guide to Bank APIs