What is Open Banking And Why is it Becoming so Popular?

a neon red, yellow, green and blue 'open' sign hanging on a windowed door for the blog what is open banking?

Open Banking is quickly becoming one of the most popular methods of payment, so it’s time to make sure you know everything you need to get its benefits!

Open Banking allows customers to share their banking information with other parties or companies.

Open Banking is the sharing of data between banks and third parties. It allows customers to share their banking information with other parties and/or companies, but it’s not just about sharing – it’s about using that shared information in new ways that can be beneficial for both consumers and businesses alike.

The sharing model works like this: a bank gives a customer access to their data, which is then stored in an encrypted format on secure servers at the bank. This means that anyone who has permission can view these accounts – including you! In addition to being able to see your account information, you can also modify things like spending limits and alerts as needed. However, unlike traditional online banking systems (or even some mobile apps), Open Banking solutions give control back over what happens with your money once it leaves its bank or goes into another account entirely (for example, if someone wants help managing their finances).

Open Banking is the secure way to give providers access to your financial information.

The Open Banking Standard is a secure way for financial institutions and third party providers to share information about you and your accounts. This means you can give the banks, or third party with whom you do business, permission to share certain data with those companies that provide products or services that might be of interest to you.

Open Banking gets its name from the Open Data initiative in the UK’s banking sector.

The Open Data Initiative was introduced in 2013, as a way of making data more accessible to people, businesses and organisations. It’s about making data more open and free to use – increasing transparency, improving public services and making sure everyone has access to information.

The original idea was to create an open and secure application programming interface (API).

An API is a set of routines, protocols and tools for building software applications that defines how two pieces of software interact with each other. For example, when you’re using mobile banking on your phone!

The goal of Open Banking is to make sure that any business can talk to another business’ system in order to get information about customers or payments in real time.

The first wave of Open Banking was rolled out in 2020, with customers able to opt in. But the second wave, dubbed “Open Banking 2.0”, allowed banks and third parties to use data from multiple providers, enabling companies to access data about their customers’ finances for them to use in different ways.

This all means that companies can offer new services such as loans or payment solutions through online platforms, and they can now do this at a lower cost than traditional providers.

By sharing information between banks and businesses, consumers and merchants alike can reap the rewards of lower transaction fees or better deals on financial products, including insurance or mortgages!

Open Banking regulations have been introduced across Europe as part of the second Payment Services Directive (PSD2).

PSD2 is a European Union regulation that was introduced to make it easier for customers to access their data and use it in different ways, making payments more secure and giving customers more control over their money. 

Under PSD2, all banks must be able to provide payment services to third parties, such as payment providers and fintech companies. They must also supply them with a secure interface for third parties so that they can access the bank account of their customer when needed. This means, as a consumer, you’ll be able to use new services by selecting “yes” when asked whether you want your bank details shared with them. 

The directive was implemented in the UK in 2018, under PSD2’s successor – Open Banking!

So, what are the benefits of Open Banking for consumers and merchants?

For Consumers

Open Banking can help consumers get a better overview of their finances and make new, informed choices. It’s no secret that consumers want to feel in control of their finances, but many are struggling to do so. Open Banking services provide a great way for consumers to take control over their money by giving them more choice and information about what is going on with their bank accounts. 

One of the key insights from the Open Banking Impact Report (October 2021) was that “most users say that open banking apps are helping to resolve their biggest financial challenges – keep to budgets, reduce unnecessary expenditure, and shop around for deals.”

For Merchants

To add to the benefits their customers will receive, there are many positive results for businesses to reap, too! 

From reduced transaction fees allowing them to save more money, to the increased likelihood of repeat customers due to offering their preferred payment methods – the adoption of Open Banking gives businesses a great way to stay ahead of their competition. 

An ECOMMPAY whitepaper published in 2021 found that 71% of customers would abandon a purchase if their preferred payment method isn’t available. So, as Open Banking continues to rise in popularity, providing it as an option is sure to make you an ideal choice for your customers!

Other benefits, for both businesses and their customers, include the reduced risk of fraud. As Open Banking uses the customers bank login for any authentication, they are guaranteed a safer experience, whilst also cutting out the risk of NFC fraud by removing the need for credit/debit cards (meaning no chargeback risks for the merchant, too!). 

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