Every aspect of our lives is transforming into a digital experience in this era. Starting with the mail which took days to arrive at the destination converting into an email which reaches the recipient in seconds and buying items from a shop converting into a few button clicks on an online shop, now we are at a stage where the cars drive themselves.
So everything is becoming easier, faster and better. Since the economies started to convert into a digital data-driven age, ability to access, edit and share data easily and fast has become a major requirement of any individual. Everybody is trying their best to fulfill all of their needs like shopping, paying utility bills, transferring money easily with a mobile application or a website. But when it comes to doing financial transactions online, we have to face a lot of hassle if we don’t have a virtual wallet like Paypal, Skrill or AliPay. This is because most of the banks are built on top of legacy systems and they don’t even think about supporting online transactions.
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Emerging of credit and debit cards like VISA, Mastercard, American Express and the banks building up their own online transaction systems bridged this gap up to a certain extent, but still, there is a lot that can be done to ease the process of financial transactions that we do. That is where Open Banking comes into play.
What is open banking?
Open Banking is the process of opening the internal services provided by the banks in the form of open, standard and secured APIs to the external world to be used by third-party developers to provide services and applications based on the existing financial institutions to the general population. If I put it in a more delicate way, this means exposing an API which can provide bank services from the bank to the outside with a standard common to all the banks. Authorized third parties can develop applications to consume these APIs and provide better facilities to the general population and the important point is this. The third parties do not have to build separate applications for each bank (like what we have now), as the API exposed is common to all the banks, the third parties can develop a single app to support all the banks which follow Open Banking. So all your bank accounts get incorporated into a single digital wallet Just Like That!
How it helps the customer?
Most of the banks are preoccupied with handling the transactions in an existing way and they have no interest in building a novel solution to help the customers. On the other hand, banks are not IT companies, so they don’t have the capability of handling all the customer transactions in an existing way and to develop tech-savvy apps to help the customers at the same time. When the banks are struggling to develop new facilities to the customers, there are third-party developers who have awesome apps to help the customers, but they don’t have a customer base. Open Banking bridges this gap as follows. The banks expose an API for their services and keep functioning as usual. The third-party developers(sometimes Fintechs) can deploy their solutions to the general population by consuming the open APIs provided by the banks. So the banks don’t have to worry about developing new apps to facilitate the customers and the third-party developers don’t have to worry about finding a customer base as they can provide their solution to the existing customers of the banks. So with the help of Open Banking, we get to transform our financial transactions into a few clicks on our mobile or computer and do our transactions faster and more secure.
What Does Open Banking bring to the table?
Open Banking defines a standard which all banks should follow when exposing their services to the outside as an API. As there is a standard API across all banks, third-party developers can easily aggregate all the customer bank accounts into one digital account and do all the transactions and payments of the user through that. Only verified and authorized third parties are allowed to use the APIs exposed by the banks. Therefore this makes the users’ financial accounts more secure because they don’t have to maintain online accounts for each bank which is more prone to attacks. Open Banking promotes the third parties to build new services and provide better solutions for the users which in turn facilitate the customers by introducing new ways to do payments and accept payments. Open banking provides better transparency to the data. The users can easily see their own financial position without having to check each bank account separately and analyze the statements one by one. It also reduces fraud by allowing the third-party apps to go through the users’ transactions on all bank accounts and identify potential frauds(When the app has access to all the bank accounts of the user it can easily identify if there is any unusual activity happening on a single bank account).
Drawbacks of Open Banking
Even though Open Banking looks awesome, it comes with its own drawbacks. Open Banking centralizes all the user data into one place. On the one hand this is more secure as you have to protect only one place, but on the other hand, if this place gets attacked all of your data gets exposed. Moreover, Open Banking involves lots of sharing of data and your data gets into the hand of someone else instead of the banks you trust.
Open Banking standards minimize this by enforcing strict rules on who access your data, what parts of your data is visible to third parties, how to verify a third party etc. But similarly for any other system, when you go digital nothing is 100% secure and easy and you have to make a decision based on the tradeoff between the pros and cons of Open Banking about whether you want to use third-party applications or not.
Till next time, see ya!