Open Banking is one of the biggest changes in the financial world in recent years. Here we discuss why Open Banking was introduced.
What Is Open Banking?
To start with, Open Banking describes the practice of banks sharing various data with authorised and regulated third-party providers. Banks can provide these providers to consumer banking transactions and financial data by using secure application programming interfaces (APIs).
The Goal Of Open Banking
Open Banking was introduced to let banks release the data they have on customers in a secure and standardised way. GDPR and open data legislation has led to the need to keep customer data as secure as possible whilst providing consumers with more choice and control of their financial information. Open Banking has formed as a vehicle to make it easier for third parties to offer a range of services to help consumers. Fintech companies have the necessary information now to create and offer innovative products and services to help consumers manage their finances, pay for services in an easier format, and much more.
The ultimate goal of Open Banking is to improve financial services to consumers. Data that was historically kept in house by banks, is now available to be shared, with express permission from consumers, to provide a wealth of new, exciting financial opportunities.
Banks give the APIs to authorised financial service providers. These APIs contain various pieces of information including the account holder information, what type of account it is, and transaction history. This information is available to third-party service providers once the account holder has explicitly given their permission. This permission is usually given through completing an online form and agreeing to the terms and conditions. APIs are used in order to create a secure method of data communication and sharing.
Why Was Open Banking Introduced?
Fewer Transaction Costs
To accept card payments, merchants need to pay a transaction fee. These fees can quickly add up and lead to a substantial outgoing. This cost, in turn, is often passed onto the consumer through increased product and service prices. In recent years, catapulted by the global pandemic, has led to consumers usually turning to their credit cards rather than carrying around cash. Learn how TrustistTransfer fees compare to card payments here.
Merchants in physical stores and restaurants used to often only accept card transactions over a certain spend which can lead to customer frustration. Also, when people were told to move to cashless payments, this tactic was no longer viable. Open Banking has been created to help shoppers pay for goods and services directly to merchants via their bank account in the most seamless way possible. Merchants can send customers to their web page via a payment link, and the payments can be made in a matter of clicks. Customers are pleased with the simplicity and ease whilst merchants do not need to worry about hefty transaction fees anymore. They don’t even need a card machine as it can be done through the customer’s smartphone.
Companies Can Use Payment Initiation Services
Open Banking has allowed companies to use payment initiation services that can offer customers a better experience online when shopping. Through open banking and the ingenuity of Fintech companies, purchasing something online now does not need to involve a host of form filling. Consumers can now purchase online in a matter of clicks. This is perfect for consumers as it avoids frustration and is a great time saver and also benefits companies and customers will find it easy to shop with them. An inconvenient, non-user-friendly checkout process is no longer a need for concern.
Fast Information For Lenders
The introduction of open banking has significantly helped lenders as loan providers can now easily access the financial information they need from different banks with ease. Previously, lenders had to obtain a huge amount of data about an individual and this could turn into a lengthy process. Now they can request the information they need and receive it within minutes, as long as they have the applicant’s expressed permission to do so. The process is now not only quicker, but it also doesn’t involve as many resources.
Open Banking vs Legacy Banking
There was a need for Open Banking to be introduced in order to address the drawbacks of legacy banking. Previous methods benefited the large banks but not necessarily the consumers. The older methods and frameworks had limited ability to interface with other systems and left no room for innovations and inventions within the financial sector by Fintech companies. Open Banking has not only provided space for ingenious new services and innovations to help consumers and businesses alike with payments, but it has also created competition for banks who will need to match the new offers and compete on price to offer the best value to their customers.
Open Banking has changed the payment landscape significantly. It was introduced to provide customers with more control over their finances and be able to benefit from a whole host of new products or services created by Fintech companies. Whilst Open Banking is still new to many people, it is something that we will inevitably see a lot more of as it becomes more mainstream.
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