Perhaps you have a vague notion of what open banking is or does, but you’re looking for a clear open banking definition: you’re in the right place. The concept of open banking means enabling third-party software providers and banks to build new, customer-centric financial applications and services. But there’s much more to it than that. At its heart, open banking is about giving customers control of their financial data.
Customers allow other third-party organizations to access their data (with their permission) and stimulate innovation in the fintech industry. They exist outside of your banking relationship, although they may be engaged in your online transactions, and there are two types:
- PISP – Payment Initiation Service Provider
- AISP – Account Information Service Provider
You may use a PISP to make online payments without having to enter your credit or debit card information.
An AISP is an internet service provider who has permission to examine specified information from your account. This can include balances and transactions for a set time period.
Now that we understand the role that third-party providers (TPPs) play when it comes to open banking, let’s take a closer look at what open banking is and how it can benefit your business.
What is open banking?
In traditional banking, banks have the highest impact on their existing business models.
However, open banking enables more opportunities to work with fintech companies. It allows you to focus on innovation and create new products that benefit everyone in the ecosystem.
Open banking proponents claim it increases the availability of financial services, like making it easier to exchange financial data with your mortgage lender or accountant. Open banking provides a broad dashboard-style view of your money. It also allows you to do things like link a bank account to a loyalty program. You may also be able to permit a third party to make payments on your behalf from your bank account.
But despite all of the advantages that open banking can offer, it does come with regulations which banks may find burdensome.
Are there any regulations tied to open banking?
The term open banking refers to two different pieces of financial regulation:
- The Competition and Markets Authority’s (CMA’s) “Open Banking Remedy.”
- European Payment Services Directive 2 (PSD2).
The first one results from an investigation in retail banking by the CMA. This non-governmental British authority has found different holes within the system and has laid out a set of remedies to improve the industry. These include Open Banking standards.
The second is a European Directive that aims to regulate payment services and payment service providers within the EU. The main objective is to increase competition and participation in the payments industry and from non-banks.
What are the benefits of open banking?
Open banking APIs are assets for all financial services firms, as they enable them to improve their existing customer engagement, as well as appeal to new prospective customers by meeting their changing demands on accessing their financial information. It also builds new digital revenue channels focusing on banking APIs.
You may have already used third-party financial management tools that open banking would improve on, apart from the banks, regulators, and startups. Consumers will have more options in managing money, borrowing, and making payments.
As a consumer, you can connect your bank account with a website or an app that tracks your spending behavior and provide a new product recommendation like a savings account, investment options, or credit cards.
How safe is your data?
Companies involved in open banking should not automatically share consumer data with third parties. Open banking entirely relies on sharing the data, but as a consumer, you might prefer to keep your information private so no one will get access to your data.
If you prefer to stay banking the way you currently do, you can, and no one will force you to change or opt into an open banking space.
All the products using open banking are required to register with The Competition and Markets Authority’s (CMA’s) “Open Banking Remedy and Financial Conduct Authority (FCA),” either in the UK or via the EU regulators.
You can also validate the third-party company you use for your financial management tools. They should also tell you on their website or mobile app if they are authorized, along with their registration number.
As long as they are authorized, providers will only have access to the data needed for the service you have signed up for. Make sure to find out how well the third party can secure your information and how they will use your information before sharing your data with them.
Open banking definition “defined”
When you break it down, open banking isn’t hard to define. If you’re using it, you’re allowing a third party to help facilitate your financial transactions. It’s delivering new benefits to customers and new possibilities for the financial services sector because of governmental action, changing consumer behavior, and the innovation and collaboration spurred by financial technology firms.
Axway offers financial services solutions
At Axway, we help companies develop innovative goods and services that provide a road to completely integrated finance. We can help improve and customize your consumer interactions with the support of fintechs and other partners.
With Axway Open Banking at the center of your strategy, you have the tools and expertise to unleash the full value of your data and unlock all the open banking benefits: brilliant customer experiences, create new business services, and accelerate growth in the emerging world of embedded finance.
See how Commerzbank is delighting customers and creating new business models as it moves from digital banking to open banking.