Made mandatory in 2018 as part of PSD2 (the European Payment Services Directive), Open Banking aims to take advantage of the vast amount of data held by banks by legalising its exchange with other organisations in the banking sector - particularly fintech companies. Banks are veritable data centres and hold a huge amount of information: bank details, transaction links, etc. Open banking is therefore an opportunity for personalisation and innovation, especially for fintech companies.
What is open banking?
Open banking is a term used to describe the sharing of customer data collected by banking institutions with other companies, such as startups. It's about taking advantage of circulating data to improve customer service and personalisation levels. This innovation was not originally created by banks. It came from the European regulator in response to FinTech's desire to create an innovative, modern and competitive market for payment methods and services.
In January 2018, the regulator unveiled the European Payment Services Directive (PSD2). The directive aims to open up the banking ecosystem, strengthen the security of online payments and promote innovative financial services. This is a real opportunity for the rapidly growing digital financial services sector, which has a bright future ahead of it. Some banks are wary of this forced exchange, as the adoption of open banking requires a transformation of traditional banks and their internal organisation.
What are the main applications of open banking?
By enabling the secure exchange of financial data between different institutions, open banking has catalysed many innovations in the financial sector. It significantly increases customer access to new financial services such as personalised financial management applications, comparison tables of banking products and simplified payment solutions. The emergence of peer-to-peer lending platforms has also been made possible by open banking, offering individuals and organisations more flexible and affordable financing options.
In addition, open banking is facilitating the development of more efficient cash management solutions for businesses, allowing financial data to be seamlessly integrated between different systems. In the insurance sector, open banking opens the door to innovation by providing personalised pricing and access to insurance products tailored to specific customer needs. It is also driving the development of digital asset management services, offering investors more transparent and personalised access to their investment portfolios.
Sharing banking data to drive innovation
Since 2018, the banking market has seen the emergence of many start-ups. In some cases, they are already competing with traditional banking activities. This applies, for example, to neobanks, which are taking full advantage of the sector's digital transformation to offer more flexible and personalised services. In general, these companies are getting rid of intermediaries in the banking sector and simplifying banking.
Often, disruptive companies are ‘account aggregators’. They allow customers with multiple bank accounts at different institutions to consult all their accounts in a single interface. PSD2 has facilitated this upheaval and the emergence of new players in the financial services sector. Beginning with PSD2, banks are required to allow their customers to merge their accounts in third-party applications.
What is the impact and opportunity of open banking for businesses?
While open banking has a significant impact on individuals, it also has implications for the internal workings of companies. Financial startups have realised this and now offer a wide range of specialised financial services. These range from accounting with Chargebee to fraud prevention with Trustpair. These startups offer companies digital services that can aggregate, analyse and sort through multiple external data sources. This greatly simplifies operational tasks related to accounting, treasury, HR and internal audit. This is a great opportunity to simplify sometimes tedious processes and improve operational efficiency.
What is an API?
The objective of open banking is to provide seamless access to data from different banking groups. Fintech companies often use APIs to access this banking data. An API is an application programming interface that enables a specific exchange of data. It shows the types of data that can be exchanged, categorises it and requires the activation of one or more authentication keys. The use of API keys helps to protect data, as otherwise any unauthorised person or organisation could gain unauthorised access to it.
Open Banking - a seamless data sharing system?
Open Banking opens up access to banking data to FinTech players. Therefore, the question of data security is a legitimate concern. Neither financial institutions nor new players in the banking sector want their customers' data to be stolen by hackers. Large international banks and credit organisations are particularly sensitive to this issue. This issue has become even more pressing since the General Data Protection Regulation (GDPR) came into force on 25 May 2018. In addition to tightening security protocols, it provides for serious penalties for non-compliance. Against this background, open banking represents a real challenge for the banking industry.
What does the RGPD provide for and how does it affect companies?
The RGPD aims to protect consumer consent and underpins the collection and processing of their personal data. Banks must therefore not only ask consumers for their consent but, under the ‘right to be forgotten’, ensure they have access to their data. They must also guarantee them the right to rectify and revoke their data. In addition, the new European rules increase the legal responsibilities of those who collect and process data, such as banks.
The latter are more concerned with maximising security to avoid the risk of sanctions under the RGPD. Therefore, each bank must both make its data available through secure systems and protect it so that it does not become a target for fraud. Despite established protocols and processes, fraud can still occur. Today, it is most commonly cyber fraud. While cybercrime is based on the digitisation of tools and processes, it also takes advantage of the human element.
Conclusion
Open banking has opened up huge opportunities for banks and fintech companies to innovate and personalise services. In the future, open banking will continue to transform the industry by creating new products and services and improving the user experience. However, the success of this transformation will depend on how effectively banks and fintech companies can integrate modern technology and adapt to changing market conditions without losing sight of the importance of protecting customer data and privacy.
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