As a focus of innovation in finance, Open Banking is poised to define the future of financial products as well as access to technology, data, and information. But what is it? Open Banking is a technology-facilitated agreement between financial institutions, customers, and third-party providers to get more value out of financial data.
For many years, attempting to get a complete view of a business’ financial situation has been complicated: multiple log ins, paper statements, spreadsheets with arcane (and error-prone) equations. None of the different institutions communicated with each other so the customer was forced to gather up information in a variety of ways and try to aggregate it together. Open Banking changes that.
Here are three fundamentals to master for unlocking the value of an Open Banking future:
- Policies of Consent: customers opt-in to Open Banking.
- Banking APIs: technology facilitates data sharing for Open Banking.
- Network Expertise: specialized third parties increase value of bank data.
Fundamental 1: Policies of Consent
The primary concept of Open Banking is that a 3rd-party is given access to the financial data of a business or customer. In order to do this and maintain the security and privacy of the account, financial institutions need to have a policy and process for allowing their customers to consent to the sharing of data with other providers.
Challenges here include handling any issues brought up by regulators, reticence to embark on the required technology initiatives, marketing concerns with the potential to lose customers if bank data is easily portable.
These challenges are, however, being overcome across the world. It’s only a matter of time until the policies, terms, and technology investments are standard in the finance market. Organizations tackling these issues today will be in a position to improve their position in the financial services industry of tomorrow.
In Open Banking the customer is always in control of their financial data.
Fundamental 2: Banking APIs
In order for two technologies to exchange information they need to have some kind of common language, a common interface. These are often referred to as application programming interfaces or abbreviated as APIs. A banking API is a technology communication protocol that allows banks and third parties to use software to share information for the benefit of consumers.
An API consists of two main components:
- technical specification of the information that is going to be shared
- a functional software interface that conforms to that technical specification
In practice, one piece of software requests information in a specific format from another piece of software. If the policies of consent are satisfied and if the technical specifications are in order then the information is shared.
The power in using APIs is that information that may have limited use all by itself may have much greater value when combined with other data, as we’ll see in the next fundamental of Open Banking.
By following the policies of consent, a third party financial service can use banking APIs to access specific information on behalf of the consumer. This allows companies to provide new services and free up the bank to focus on banking.
With Open Banking, financial institutions and third parties establish a technology-based means of sharing information on behalf of customers.
Fundamental 3: Networked Expertise
The promise of Open Banking is founded on the idea that providing better context around financial data can improve life for businesses and people. By improving cash visibility people can learn to make better decisions about investments, payments, and generally do a better job at cash management. There is greater power in orienting a complete financial view–encompassing physical accounts, virtual accounts, multiple currencies–than evaluating a single-metric report like a single account balance.
With Open Banking, financial data can be contextualized and used for better decision-making and action.
Open Banking Fundamentals
Whether it’s delivering financial services in new formats, like a mobile app, or entirely new services such as automated cash management or real-time payments processing, the power of Open Banking is in the expertise and experience of adding third-parties to a business’s cash management strategy. Here are three fundamentals to get there:
- Customers control their data, banks have policies of consent.
- Bank APIs exist to facilitate the transfer of data according to the customers’ consent.
- Third parties deliver genuine, meaningful value based on their expertise and experience.
Trovata is a leader in Open Banking and cash management software for finance and treasury operations. Speak with one of our experts and begin experiencing the power of our Open Banking platform.