Open Banking Explained

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In the banking industry, Open Banking is a driving force for growth. Open banking enables customers to securely exchange their financial data with other financial institutions while relying on networks rather than centralization. It could assist lenders get a better comprehension of a customer’s financial status and potential severity through the use of integrated accounts, allowing them to deliver more profitable loan terms.

The intention is that by allowing developers to access this data, the mobile market would see improved innovation as developers create applications that use data in a consumer-friendly manner.

As a banking customer, you own your data and have full autonomy of who has access to it (even more so now that General Data Protection Regulation has been implemented), and you are not allowed to disclose your data if you do not intend to. Alongside that, the mechanism by which clear and repeated customer consent must be issued to a TPP before they can access bank account details or initiate transfers is at the core of all Open Banking customer journeys. 

Here are a few terminologies that determine Open Banking:

  • Account Information Service Providers (AISP) is authorized to retrieve account information from banks and building societies. For instance, a money management application aggregates current account data (based on explicit consent) from several banks to help you handle your accounts more efficiently.
  • Account Servicing Payment Service Providers (ASPSP) are banks or building societies that publish Read/Write APIs that enable Third-Party Providers to access customer account information and facilitate payments (with customer consent). Whereas, to make matters much more challenging, an ASPSP may also be a TPP that is elaborated below.
  • Third Party Providers (TPP) create custom applications (typically smartphone applications) that interface with ASPSPs’ (Banks’) APIs to provide account information and/or payment initiation services on behalf of consumers. TPPs are Payment Initiation Service Providers or Account Information Service Providers.
  • One of the two core concepts of the Regulatory Technical Standards is Common & Secure Communication (CSC), which requires banks to open access to consumer data and allow payments through a collection of secure, common APIs. The aim is for Third-Party Providers to retreat to a more secure method of accessing data through APIs from outdated and unreliable “screen scraping” of customer data.
  • Strong Customer Authentication (SCA) is the second of the two core principles of the Regulatory Technical Standards, implying that an additional layer of authentication security is inserted into an ASPSP’s online payments path to “step up” a user while verifying. 

To Conclude

The application cases for Open Banking need not be constrained to third-party applications. Banks are now investing in their API offerings above and beyond the bare minimum in regulatory compliance whilst Open Banking has acquired the capacity to determine the experiences of both consumers and open finance participants. Open finance broadens Open Banking concepts and enables customers and companies more influence over a broader spectrum of financial records, including savings, insurance, mortgages, investments, pensions, and consumer credit.

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