In a rapidly evolving financial landscape, the global open banking market is set to skyrocket from $7.29 billion in 2020 to an astonishing $43 billion by 2026. This remarkable growth underscores a transformative shift towards collaborative financial services. Coupled with this momentum, a recent study reveals that 72% of consumers are eager to embrace third-party services for their banking needs, signaling a strong demand for innovative, user-friendly solutions. As open banking reshapes how we manage our finances, exploring the opportunities and challenges of this exciting new era is crucial.
What is Open Banking?
Open Banking is the practice of providing access to financial services like bank account information and payments to providers other than your bank. It allows the sharing of data across institutions such as your bank and third-party service providers.
Before Open Banking, you needed to use your bank’s own online services, either a mobile app or internet bank, to get an overview of your finances. And if you needed to pay for something or make a payment to someone, it was either with a credit card or through your bank’s internet bank or mobile app.
Along comes Open Banking. Now, for instance, you can carry out payments directly from your bank account when shopping on apps or websites. You can also get a total overview of your account balances, even if you have accounts with several banks.
In other words, Open Banking provides a wider range of ways to view your finances and makes it easier to make payments because data can flow between various apps or websites.
An example of Open Banking would be that you, as a consumer, can receive all your bills in one mailing app. From there, you can pay your bills directly from your bank account without having to go to your banking app or website. This mailing app will let you choose from which of your various accounts you want to withdraw the money while staying on the app.
How does Open Banking work?
The foundation on which the entire concept of open banking is built is the seamless exchange of consumer data. The exchange is technically enabled by the use of APIs, which stands for an application programming interface. An API is an interface which can connect different IT systems and let them securely share real time data. These can be the IT systems of a bank and a fintech company, for instance. In simpler terms, an API can make two IT systems “communicate” with each other despite the fact that these systems are not from the same company. APIs make it possible for the software at one company to “plug in to” and access information from the software at another company in real-time.
To further improve your security, the industry is moving toward more “tokenized” access, also known as “Open Authorization” or “oAuth” connections. oAuth connections involve providing a third party with a “token” — a coded alternative to your bank account credentials that have no meaningful value if breached. In regulated markets, many procedures are in place to protect you and your data against potential fraud and loss.
Is your data safe in Open Banking?
Thanks to their convenience, digital payments through open banking are already widespread and growing rapidly. However, with so much data being exchanged, it’s only natural to feel uneasy. Questions about where your sensitive information is going and who is handling it are especially important, given the critical nature of this data.
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