Will Open Banking Start a New Era in Digital Banking?

Disclaimer: the original blog post has been published at 98elements blog.

Looking around, you certainly notice that we are making more and more non-cash transactions. There is a great deal of options available: debit and credit cards, mobile applications of our banks, smart watches. There is no coming back to the old days, when you always had to carry cash with you. We are becoming more and more dependent on modern ways of paying for goods. While credit and debit cards are not such new inventions, online banking is still fresh on the market. Those who still remember going on summer camps with some cash in their wallets know something about money management. Today’s kids don’t have to worry about sudden lack of money on holidays. Isn’t it what online transfers from parents are for? Since we are so accustomed to non-cash and online purchases, can we imagine that spending money can be even simpler?

Let’s take a look at the trends in the banking industry stemming from the introduction of Open Banking. If you are not yet familiar with the very idea of Open Banking, you can learn more here: “What is Open Banking”.

Introduction of Open Banking

Open Banking is a new system working thanks to APIs that helps bank clients to connect with all financial institutions data. Clients will now be able to share their financial information with third parties. The system operates in accordance to European Union directive PSD2 stating that banks are obliged to provide access to their clients’ accounts to external entities.

Who is Open Banking addressed to? In fact, everyone. Open Banking is targeted at individual consumers, representatives of financial institutions and other companies from outside the banking sector.

The Benefits of Open Banking

Let’s take a look at the benefits of Open Banking, since there are quite many of them:

• Easier way to transfer funds
• Easier Budget Management
• Transparency of information and offers published by banks
• Obligatory notifications about activities on the account, i.e. greater security.

Easier way to transfer funds

These are basic benefits that definitely sound encouraging. The ease of transferring funds is certainly one of the most important factors of using online banking. No wonder that the creators of online payment systems are heading this way. They are to be easy and safe to use. The focus of most innovations in banking industry is to make banking as simple as possible. New mobile apps, online system and innovations are introduced to make the payments seamlessly integrate into everyday life. Competition between banks and their offers has to become public; therefore clients can consciously choose the best offer for them. What is more, banks are obliged to alert the customers about any extraordinary activities on our accounts, so theoretically it should prevent any fraud.

Easier Budget Management

One of the most important concepts of Open Banking is the idea of promoting money management. Since the client will allow third parties to access their financial statements, all sorts of apps created to control the budget, or help us in making any sort of financial decisions, will be able to advise on how to save money more successfully. Depending on the functionality they can also make suggestions about better deals in everyday expenses like cable TV, bills, or shopping habits comparing our spending with what other people do. There are many advantages of Open Banking and it is visible that the system quickly becomes an ideal gold mine for the creators of mobile applications supporting it.

Transparency of information and offers published by banks

If Open Banking already seems to be an interesting idea, what about access to loans? Thanks to the system, lenders should receive immediate access to all necessary data, making the whole process much easier. It also applies to business loans. Open Banking is supposed to facilitate complex loan acquisition processes. After client’s approval, banks should be able to get access to information they need in order to consider granting a loan.

It appears that Open Banking has a lot to offer small and medium-sized enterprises. There are many companies on the market that have skeptical approach to changes regarding banking services and are still stuck with unfavorable deals. Open Banking is about to alter this approach, since access to competitive offers will be easier than ever. As a result, existing SMEs, or even newly created Start-ups, will be able to enjoy better deals.

Possible Drawbacks

Seeing all these potential advantages, it is essential to consider possible defects of this system. Since Open Banking is supposed to encourage enterprises to seek better solutions, how to proceed with the clients that are skeptical of any changes? There must be reasons why some businesses are stuck with poor solutions and one of them is fear, fear of change, or rather fear of change for worse. That is what is blocking possibilities to grow and that is why one of the most common concerns is whether Open Banking is secure. How can it be secure if we’re about to share our confidential data with third parties? What is promised to us is an encrypted, protected and confidential information sharing system. Clients will have to agree to share their data with third parties.

Open Banking is designed to facilitate the life of the client. Still, there are possible threats, which cause the clients to approach Open Banking with reserve. We need to keep in mind our security and choose software legitimized and recommended by our bank. If banks and fintech companies notice its full potential, then Open Banking may turn out to be one of the most important innovations on the market. Still, there is also other concern regarding Open Banking. It limits interpersonal relations between the client and provider, which result in less trust.

Since 2018, when Open Banking became legal in EU countries, it turned out that the idea appealed to a rather limited number of clients. For example, in UK, several fintech apps were introduced, some bigger banks slightly improved their offers, but that is pretty much it. A great boom was expected, while the introduction of the system passed without much echo. Despite this, Open Banking has potential and may prove to be an interesting change in the banking system. However, what is still missing are ideas and patterns for technical solutions that would interact with the system and guarantee security by meeting safety standards. Having that, and a promotional campaign that would convince those who are reluctant to changes, Open Banking would have a chance to succeed. In other words, Open Banking is still waiting for bold players that can enter the market and make the revolution it promises actually happen.