In the vibrant city of Financia, there resided a young, ambitious woman named Lily. Her aspirations revolved around acquiring a new home before her 30th birthday. Lily had tirelessly scoured the real estate market in search of the perfect home, and after an exhaustive search, she finally stumbled upon her dream house. The real estate agent delivered an ultimatum, allowing her just 30 days to secure the property with the required funds. Failure to do so would result in the house being sold to another buyer.
The price tag for her dream house was set at 75000 £, and with only 25000 £ in her savings, Lily found herself 50000 £ short. Determined to take the first step, she committed her entire savings of 25000 £ as an advance payment. She pursued every possible avenue to get a loan, approaching the banks where she held accounts namely Bank A and Bank B. Unfortunately, she rejected the loan due to an unaffordable interest rate in Bank A, and insufficient loan amount sanction from Bank B.
But, the clock was ticking!!
Lily’s anxiety grew as she worried about losing the house, she had set her heart on. At this critical juncture, a conversation with her friend, set to be a turning point.
Lily was intrigued!
Could this be the answer to her loan search?
Well, let’s see what happens.
Following her friend’s advice, Lily downloaded the “Hope” app, an open banking platform. Once she downloads the app, Lily has to give her consent for the app to access her financial record. Usually, it requires a government ID and basic information like name, age, date of birth, etc.
Upon receiving her consent and acquiring her basic details, the app was able to access her details like bank name, account type, transaction history, credit score, etc. Through the comprehensive financial data, the app discovered her loan needs and her financial behavior.
Based on Lily’s financial behavior analysis, the app was able to deduce that she needs a loan, and her previous attempts didn’t bear fruit. So, it will start showing her a few loan options that would suit her financial capacity.
Finally! Just like she dreamt, Lily was able to secure a loan at an affordable interest rate and expected loan amount from Bank X.
And this is how Open Banking works i.e., unlocking our financial freedom.
What is Open Banking?
Open Banking, enabled by the Payment Services Directive (PSD2) grants third-party financial providers open access to consumer banking and transaction data via APIs. These APIs (Application Program Interface) enable third-party financial service providers to securely use the customer financial data and foster collaboration by expanding the user base. It empowers customers by providing an avenue of innovative financial services, including budgeting tools, loan comparison, and more.
But what exactly is PSD2 that paved the way for Open Banking?
PSD2 is a European Union regulation to enhance competition and foster innovation within the financial sector. It dismantled the exclusive control that banks traditionally hold over customer data, enabling other businesses to access and utilize this data with the customer’s explicit consent.
How Open Banking works?
- The primary step is the technological collaboration with the traditional banking system to access the financial data.
- The next critical aspect involves determining which banking product data should be shared and in what format, as per the protocol.
- The tertiary step is mitigating the data breach. To facilitate this, protocols, including end-to-end encryption, are implemented to ensure that financial information is only accessible to the intended parties.
- The final initiative is the consent management phase, which involves obtaining explicit consent from consumers whose data is being shared. This consent encompasses details such as
· What data is shared,
· The purpose of sharing,
· The duration of data access,
· How long data is stored by the requester,
· The frequency of data request, and
· The option for consumers to pause or revoke their consent at any point in their journey.
How does Open Banking differ from Traditional Banking?
Features of Open Banking:
Open Banking boasts a range of features, each designed to revolutionize the way individuals interact with their finances:
- Account Aggregation: Open Banking simplifies the complex task of managing multiple bank accounts. It enables the consolidation of information from various accounts — be it for salaries, investments, or savings — into a unified platform. This consolidation not only streamlines account monitoring but also enhances the overall financial management experience.
- Personal Finance Management: Leveraging financial data, open banking platforms offer users an invaluable tool for gaining a comprehensive understanding of their financial landscape. It provides insights into spending habits, savings patterns, investment strategies, and budgeting practices. Armed with this knowledge, users can make informed decisions that align with their financial goals and aspirations.
- Credit Rating and Lending: Open Banking empowers lenders and fintech firms by granting them access to the financial data of customers which revolutionizes the process of evaluating an individual’s creditworthiness. The result is the development of more precise credit scoring models, which, in turn, leads to improved loan terms, personalized lending alternatives, and expedited loan approval processes. This feature is a game-changer for those seeking financial assistance, as it opens up new opportunities and options previously unseen in traditional banking.
- Investing & Wealth Management: Wealth management fintech companies are now able to harness a customer’s financial data, risk tolerance, and financial objectives. This data allows them to craft tailor-made investment advice and strategies, leading to a more personalized and potentially lucrative approach to wealth management.
- Instant Payment and Fund Transfer: Open Banking facilitates seamless instant payments and fund transfers. This feature ensures that financial transactions are executed with unprecedented speed and efficiency. Whether it’s splitting a restaurant bill with friends, paying for goods and services, or transferring funds to family members, Open Banking’s instant payment and fund transfer capabilities make transactions swift and hassle-free.
In conclusion, Open Banking represents a transformative shift in the financial industry, offering both opportunities and challenges. It promotes innovation, and greater accessibility to financial services, empowering consumers with more control over their financial data. However, it also introduces concerns related to data security, privacy, and scams. The success of Open Banking will depend on the industry’s ability to strike a balance between fostering innovation and safeguarding consumer interests, ensuring that the advantages it offers are maximized while addressing the associated risks.