Open Banking in plain english
To put it simply, open banking, also known as open bank data, is the process where banks and other financial institutions allow third-party providers to access and share customer data through Application Programming Interfaces (APIs).
Before open banking was introduced, traditionally, banks collected and stored vast and detailed customer data, which was closed, centralized, and kept in-house.
Now, with open banking, a channel has been created for both banks and third-party providers to easily and securely exchange these customer data with each other.
How does Open Banking work?
Open banking works through the use of Application Programming Interfaces (APIs). Essentially, APIs are the infrastructure that allows two software to talk to each other. In this case, open banking APIs provide a secure and reliable way for third-party providers to access customer data from banks with the customer's consent.
Typically, when a user links their account to an app, the API connects to their bank and retrieves their account information, identity, income, and transaction data. Equipped with this data, businesses can then build innovative, data-driven products and features for their customers and offer more personalized experiences like better ways to borrow, save, or pay.
How can Open Banking be used?
Open banking encourages financial inclusion and innovation. Being able to share your data means that you can access tailored and more personally relevant financial services.
For example, during a loan application process, you have to share your bank statements to help lenders verify your eligibility for the loan.
This usually means walking into your bank to request a signed copy of your statement. Sometimes, it could take hours and only slow down the loan application process. Open banking provides a way to skip this manual process altogether. In a few minutes, you can easily share your financial history with the lender, and access loans faster.
What are the benefits of Open banking for the everyday customer?
Gives you control over your data
For the everyday person who has a bank account, open banking gives them control over their data, and makes this siloed data accessible to third party financial data providers. For the first time in years, they can securely and easily share their financial data with businesses that need this data to provide services to them. This also ensures that these businesses can't access their financial data without their consent.
Gives you access to better credit, faster
By simply connecting your bank accounts to an app and sharing your bank statements and transaction data with a lending business, for example, you can access loans a lot faster. This is because the business is able to view your transaction history, easily verify your identity and income, and assess your creditworthiness more accurately.
Makes it easier to manage your finances
For the individual who has multiple bank accounts and wants to track and manage their finances across these accounts in one place, open banking negates the need to switch between accounts to do this. Instead, you can connect your accounts to a third-party service like a Personal Finance Management app which lets you aggregate all your transactions and balances in one place. For the consumer, this only means more convenience, a better view of cash flow, and less friction when accessing financial services.
Helps you make payments more easily and securely
This convenience also plays out when it comes to online payments. With open banking, consumers are able to make payments from one bank account to another without sharing their card details online. Paying digital businesses is also faster, with improved fraud protection, as your identity is verified before any payment is authorized from your account.
What are the benefits of Open Banking for businesses?
Improves customer onboarding
When banks open up access to customer financial data, third-party providers are more empowered to provide other businesses with the data they need to build data-driven products and services for their customers.
For some digital businesses, the KYC process usually involves requesting the customer to upload an identity document like their driver's license, or manually enter their NIN, BVN, or account details in order to get fully onboarded.
With open banking, businesses can automate this otherwise manual process. How? A user can securely link their bank account to their app, this then pulls in their valid identity data and account information so the business can verify their identity and ownership of their bank account. This ensures that customers can successfully onboard and use their products in minutes. And with a faster and hassle-free onboarding experience, businesses are more likely to retain their customers and improve conversions.
Allows you to accept faster and more secure payments
Open banking also opens up a way for businesses to collect payments from customers through bank-to-bank payments. This replaces card payments, reduces fraud, and allows for lower transaction costs. Because this involves the transfer of funds from one bank account to another during the payment process, businesses can receive payments faster and still deliver a seamless payment experience for the customer - where they can pay online in minutes without sharing their card details or leaving your app.
Allows you to securely access real-time and historical financial data
As a financial services business, you can retrieve financial data from your users when they securely link their financial accounts to your app/website. This access to accurate transaction data will allow you to assess your customers' finances to do various things, such as check your customers cash flow to determine creditworthiness and offer personalized loan amounts, to offer financial advisory through asset or personal finance management services to individual customers, or book-keeping and accounting services to businesses.
In the end, the biggest benefits that open banking present are the creation of choice and better options and more financial innovation. It offers choice to share your financial data with the businesses you want, to decide how and when they can access your data, and the ability to use financial services and products that are more personalised to your needs. As the world becomes more digital, what better way to keep up with your customers growing needs and improve their financial lives, than with open banking?