What is Open Banking?
Open Banking is a concept in the financial industry based on the following principles that should be followed by financial institutions:- Use Open APIs which can be used by third party developers to build applications and services
- Allow flexibility to support a range of financial transparency levels (open to private data)
- Promote the use of open source technology to achieve the above
This comes hand in hand with the revised Payment Services Directory (PSD2) which is a set of reforms built to revolutionize the financial industry in Europe.
Why?
This concept was introduced by Competition and Markets Authority (CMA), who stated that the current concepts favor the "big" banks and they don't have to compete a lot to win clients, where as "small" or new banks need to compete in order to win clients.
CMA has declared that increasing the competition between banks can result in improving innovation and customer experience. Therefore, to increase the competition between the banks, CMA introduced Open Banking, which would facilitate a fair playground for the "big" and the "small" banks alike.
The ultimate goal of this is to increase flexibility of online transactions and improve access to historical data and transparency of finances.
How?
Open Banking is all about Open APIs. The institutions that adopt Open Banking concept must implement and expose APIs that support the required activities (use cases). These APIs can be used by third party service providers to interact with customers and provide services. However, authorizing the transactions or any information retrieval is up to the customer.
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