Imagine if you owned your bank data and could decide who you want to share this data with, thereby gaining access to a broad range of products to suit your needs.
Matthew Bernard, an executive at software development company BBD, says that this could become a reality through open banking, whereby a third party could assess a user’s bank information to provide superior service.
How does it work?
“Open banking involves the use of open APIs (Application Programming Interfaces) that enable third-party developers to build applications and services around the financial institution. Greater financial transparency options for account holders ranging from open data to private data.”
Open banking requires banks to open their data via secure APIs, giving access to outside developers, to allow them to develop other apps. This would provide customers with many resources to view and understand their finances. Examples of well-known open APIs include Apple Wallet and PayPal. This will put an end to the bank’s monopoly on customer’s data.
In Europe, open banking has been legislated through the implementation of the Payment Services Directive (PSD2). This came into effect 13 January 2018, with most of the large banks scrambling to adhere to the directive. Regulatory authorities passed this legislation to create more competition, leveling the playing field and ensuring a dynamic banking environment, able to adapt to customer’s needs.
As it involves online presence, there are so many issues that could occur along the way of making use of this technology. Online security is a major challenge for open banking. Potential misuse or loss of customer data is a major concern for many, as the market opens up for new players.
Although it’s not a new concept, according to Bernard, as users have already been sharing their banking user IDs and password to third parties. “The problem with this approach is that it’s insecure and unreliable, which invalidates your agreement with your bank.”
Having the right security in place when the APIs are accessed by third parties would be an integral requirement, together with a client’s express permission for them to access their data and transact on their behalf. “With constant stories of data hacks making headlines, some customers are wary of the change.”
Its Potential Benefits if You chose it.
The benefits may outweigh the risks. Open banking aims at making it easier to move banks and make smarter financial decisions. Also, money management will become easier for those who have multiple accounts, allowing third parties to consolidate data into one secure platform.
Highlighted by Bernard “Most fintech start-ups don’t have the massive funding or client base banks have. Authorized financial service providers (FSPs) can thus make use of this data to offer unique services to clients, but without having to build backend systems of their own. Innovative banks are already taking advantage of these changes by partnering with fintechs and merging the functionality of traditional banking apps with personal financial management and consolidating capabilities.”
Open Banking for South Africa
Even though the European Union (EU) started the trend by implementing the PSD2 legislation, the rest of the world is not far behind. “South Africa is already leading in this space. At BBD we are already enabling South African banks to open APIs and interact with fintech companies offering niche services. South African banks are known for being innovative and in this instance, aren’t waiting to be regulated before embracing the change.”
Similar legislation to that of PSD2 will slowly be implemented across countries. Barnard believes the South African banks that are most proactive are likely to gain market share and access new market segments, while those banks ignoring the disruption will be left behind. “One of the biggest opportunities is bringing the unbanked market into the financial system, which will require innovative approaches from many of the existing market participants. Open banking could play a role in meeting this by allowing lower-cost niche solutions to easily interact with existing market infrastructures.”
Through open banking, the future could see banks giving you access to only one app but an ecosystem of apps, for you to choose from and download those that meet your particular needs.
Source: IT News Africa