What is open banking? In a practical sense, open banking is a technology-driven approach to financial services, giving third-party providers (TPPs) access to customers’ financial data (with their express permission). This is possible through the use of application programming interfaces (APIs) to build services that can serve customers. Putting it simply, non-banks can offer banking functionality through apps, for example. There are, of course, benefits to open banking, which include:
- the freedom of choice and autonomy for consumers
- more competition and innovation for the market
- increased accessibility of services (increase in choice)
- speeding up customer approval and onboarding processes
- enhanced customer experiences (saving time through quick, direct payments)
- decrease in processing costs
- standardized use of APIs = lower cost for all parties
Early attempts at open banking (initially referred to as ‘access to accounts’) have occurred over the last decade or so, some less successful than others. However, it wouldn’t be justifiable to refer to these as failures. There was, until recently, an issue with scalability and interoperability when trying to integrate various systems to allow access to account data. This was no easy feat, requiring at the time high levels of maintenance and manpower which was difficult to manage.
So what of what the beginnings? The global financial crisis of 2007-08 played a major role in leading to demands for an overhaul of the banking system that would challenge the dominance of banks and lead to an increase in competition. The real jump-start for open banking came with the revised payment services directive in 2007 (PSD1) and 2016 (PSD2) leading to legislative requirements for Account Servicing Payment Service Providers (ASPSPs) to allow third-party providers to access customer accounts. Traditionally, ASPSPs are banks and similar institutions. Under PSD2, all ASPSPs in Europe are now required to participate in open banking and provide access to the data.