With the latest innovations in technology, the digital banking industry also seems to develop in its finest form. The collaboration of banks with third-party apps is an exceptional step for the financial market.
A recent survey shows open banking payments have crossed a tremendous 7% growth rate, with 21.1 million transactions happening in the last year.
This clearly shows how the banking sector is leveraging the latest technology and growing every passing day. But if you are new to finance or blockchain, you might not be aware of what open banking is and how it can be beneficial for a user.
Don’t worry! In this article, you will learn everything about open banking. Continue reading!
What is Open Banking?
In simple words, Open Banking is a term used when banks allow third-party developers to create new financial services. These services are introduced to ease customers, increase financial transparency, and offer better security.
Introduced in the UK, it is growing rapidly as more consumers adopt this banking experience. It is powered and backed up by an API (Application Programming Interface) that enables banks to connect with third-party apps.
These third-party apps help users to manage finances and make payments. There are two different types:
AISP (Account Information Service Providers):
These third-party providers are only concerned with read-only access to your bank account. You grant them permission to connect to your bank account and manage your financial data. These are quicker as they do not deal with the customer’s money. Some examples of AISP are:
- Money Management tools.
PISP (Payment Initiation Service Provider):
The PISP service providers deal with your money and financial transactions. They help customers to pay their daily payments so they can remain safe from overdraft fees. Moreover, these third-party providers can also initiate your payments. Some examples of PISPs are:
- Mobile pay.
The Benefits of Open Banking
Now, you clearly understand what open banking is and how the whole process works. But what are its benefits to the users? Let’s look at the advantages of open banking.
1. Simplifies Account Access
One of the best benefits of open banking lies in unique and simplified account access. With the help of third-party apps, you can now securely make your payments and manage your money on different accounts. Whether you have one account or more, open banking technology gives you the facility to manage all your accounts in one place.
2. Smart Suggestions
Besides providing account aggregation, open banking also gives you daily spending recommendations. In this way, you can save maximum money by paying less on daily purchases. Apps like Plum analyze your data charts and give you a perfect saving suggestions per your financial history.
3. Lower Fees
Are you tired of paying hefty card charges offered by credit cards and banks? Now is the time to get rid of this issue. With the help of open banking and APIs, you can save large money on higher fee charges.
For instance, the A2A (Account-to-account) payments have largely eliminated the card schemes and thus reduced the transaction cost. You can also select your preferred payment method as per your needs.
4. Improved Customer Experience
For high conversion rates and the best financial experience, open banking technology can help you a lot. Providing multiple payment options increases your business conversions both online and offline. As per the reports, open banking-powered payment methods have reduced the cart rate to 50%.
5. Innovative Infrastructure
By collaborating with multiple Fintech companies, open banking has provided an innovative infrastructure to the customers. This allows you to stay out of competition and use third-party apps for data sharing and other banking details.
Now, new financial technologies and licensed companies have joined the open banking platform and are working to improve the financial market. Here are some major benefits of open baking in business:
- Better customer engagement
- Centralized information
- Innovative solutions
- Lower service costs
- Instant settlement
- High security
- More acceptance rate
Hence, with this bundle of advantages in one line, you can trust this business model of the financial world.
What are the Risks Associated with Open Banking
Along with multiple benefits, open banking has some risks and disadvantages. Some of them are mentioned below:
1. Reduction in Banks
As more customers are shifting towards this centralized and secure open banking system, banks are at a greater risk. How? This is because all the banks cannot adopt this new technological system, and thus their consumers are reducing daily.
2. Low Customer Trust
To succeed in any new project, customer trust is highly crucial. Unfortunately, open baking has not been able to gain enough trust from the users as the platform is new in the market. Moreover, Fintech companies and banks have not fully adopted this open banking system, which has also affected their trust.
3. Security Risks
Open banking technology has provided fraudsters with a new way of committing online crimes and hacking users’ personal data. Many theft and data leak cases have been reported worldwide after the development of this open banking industry. The fraud risks may be of two types:
1) Account Takeover
Hackers and unauthorized users can take over complete access to your account, and thus your data may be at greater risk. They can easily access your account details and initiate payments as well.
2) Payment Scams
One of the major security threats of open banking is payment scams. Criminals can use your account credentials for illegal purposes and can easily use your money for their benefit.
Therefore, open banking needs some further improvements to build users’ trust and make the platform more secure. In this way, a more safe and more convenient global platform will be available for the financial sector of the world.
It is no doubt that open banking has largely facilitated the users in managing and initiating payments. With the help of new and improvised technology and third-party apps, you can easily manage your transactions and bank details. However, you have to be very careful while using this new platform as some major associated risks need approval.
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