What Is Open Banking And Why Is It So Important

In a context of low-interest rates, where the future of banking seems destined to reduce costs and find new business models, open banking has become one of the main levers in the digital transformation of financial entities.
More than an opportunity, most experts believe that banks will have to evolve towards the open banking business or lose their role as intermediaries and, therefore, a good part of their income. But what exactly is open banking, why is it so important, and what might its future hold?

What is open banking?

Open banking is a new model that allows access to all customer banking information through available platforms. In this way, companies outside the banking business can have the data of the banking entities and offer services adjusted to the behavior of the users.

Open banking means moving from banking focused on financial services and products to concentrating on the customer for the European Banking Association. The available banking model allows customers to share their data with applications developed by financial service providers to offer them services and products tailored to their needs and interests.

Therefore, open banking increases business opportunities for banks and other financial service providers. But also for customers who will benefit from innovative digital applications and a better user experience. At the same time, it represents a significant challenge for the entire industry, which will have to face a disruptive model that will completely change the banking paradigm soon.

How does open banking work?

Open banking is possible thanks to the APIs (Application Programming Interface in English or Application Programming Interface). It is a set of definitions and protocols used to develop application software and integrate with others. In other words, they are the tools that programmers have to be able to create third-party applications in a simple, fast, and transparent way.

Open banking makes use of the APIs that banks have released after the implementation of the PSD2 directive. This European regulation implies that traditional financial institutions have opened their payment services to third parties with the client’s prior consent.

The European Union establishes that the information belongs to bank clients and not to entities with this legal framework. Thanks to this, third-party companies, which do not necessarily have to be banks, can access user data as long as they have your authorization.

The security of open banking

As a result of this new regulation that regulates open banking, one of the aspects that most worries customers is their data security. Many users have been suspicious about this new model, mainly because third-party applications that a priori do not have much to do with your bank can access sensitive information such as your bank accounts, credit cards, or investments.

Well, although a priori it may seem that open banking could violate our data, the truth is that the directive itself has incorporated a set of security elements that oblige banks and technology firms to adjust their systems.
One of these settings is verification, which will be done through two factors: a password, PIN code, card number, mobile phone, and even iris scanning or fingerprint. No operation can be carried out without using at least two of these elements, which the user can only carry out.

Why is it so important?

Thanks to open banking, all the agents involved can get more out of user data and financial services.

Banking entities because they make better use of their customers’ data to offer a series of products that adapt to their needs.
Financial service providers will be able to launch their products on the market legally and transparently and provide more up-to-date information.
Users, because they will be able to access personalized financial services tailored to their specific needs. In addition, users are given greater control over their data since they can decide to whom they transfer it. Finally, open banking also facilitates the management of personal finances since the user will be able to have in a single application the data of several accounts, cards, and banking products of different entities without having to enter several applications to consult this information.