Open Banking: Is It Safe?

Open Banking, otherwise known as “Open Bank Data (OBD),” is banking practices that offer third-party financial service providers open and direct access to consumer banking, transaction, and other financial data.

This system is applicable to banks and non-bank financial institutions through the use of application programming interfaces (APIs).

Banks or any financial institutions running open banking system have the right to share customer data with third-party providers like fintech companies or other non-financial organizations.

So, if you’re wondering about the benefits of open banking if it works in such manner, then, I must tell you that open bank data is beneficial to consumers in the aspect that it let them access to a wider range of products and services.

Through their financial data shared with third-party financial agencies, they can enhance financial inclusion by providing access to financial services (such as saving money on loans and mortgages) to underserved populations.

Key Points

• Open banking is the system that empowers consumers and businesses by providing secure access to real-time financial data, leading to better decision-making, improved financial management, and personalized services.
• It helps to offer multiple payment options and a streamlined checkout process for businesses collecting payment from their customers. This helps to enhance customer satisfaction, reduce shopping cart abandonment, and boost revenue for businesses.
• Open banking reduces reliance on traditional card payments, cutting transaction fees and operational costs, allowing businesses to retain more of their profits.
• Open banking offers legacy banks the chance to innovate and collaborate with FinTechs, ensuring they stay competitive in a rapidly evolving financial market.
• While regulatory frameworks like PSD2 may pose challenges to innovation, companies that comply with open banking concept benefit from greater customer trust and market competitiveness.

Benefits of Open Banking

Open banking offers many opportunities and benefits for individuals (consumers), businesses and banks. In this section, I will walk you through some benefits of open banking for you as a consumer, as a business and as a financial institutions. Let’s dive straight in!

Benefits of Open Banking for Consumers:

• Open banking gives your bank access to share your financial data to other organizations upon request using application programming interfaces popularly known as APIs. The data shared can helps the organization to know people’s wants which will be helpful in providing support and access to a wider range of products and services, such as saving on loans and mortgage, to underserved populations.
• However, note that open banking does not just give access to your bank to share you data with third-party organizations, you also have control over the data that’s meant to be share and the one that’s not meant to be shared. This practice makes it easy for you to prevent financial fraud simply because you have more control over your data and who can access it.
• Open banking was incepted in Europe and the bank practices have been growing at a very fast pace. In fact, the founder and CEO of Lendsqr, in a fireside chat with Uzoma Dozie, CEO of Sparkle at the latest TechCabal's Moonshot cited that open banking is ready for Nigeria, but CBN’s approval stands in the way.
• However, before you adopt the open banking concept, it’s always advisable to ask yourself two essential questions; will consumers embrace open banking system and how we they benefit from it?
• These questions have been addressed in various ways. Consumers are already embracing open banking and enjoying the advantages it offers, as this banking concept helps keep financial products and services aligned with modern financial needs.
• In recent years, people have come to realize that by sharing their bank account data, they allow third-party providers to use that information to develop personalized products and services, breaking down old barriers and making life simpler for everyone.
• Not just that, it’s important to note that you have control over your financial data. In other words, your bank or the financial institution you’re using cannot share your data without your consent. So, you can decide who to access your data and who to not access it.
• Open banking was invented with a legislature that protect consumers’ rights to their data. So, you have complete control over your financial information and banking data, who can access it and level of their accessment, ensuring they receive only the necessary information.
• For example, modern APIs, that are being used for the integration of open banking, ensure that your login details and passwords remain private and accessible only to you.
• Open banking introduces new payment methods that require explicit consumers authorization for transactions. This means bank cannot process payments without the your direct consent. This is also part of the greater control over your financial activities open banking brings to you.
• Open banking enables smarter personal finance management by aggregating data from multiple bank accounts into a single, streamlined view. This is especially helpful in today’s world, where many people manage more than one account, making it difficult to get a clear picture of their overall financial health. With this unified view, you can avoid issues like unexpected fees or loan rejections.
• Third-party providers, with your consent, can use this data to recommend tailored financial products, such as better credit card options or loans suited to their financial situation. Additionally, they can offer money-saving tips and suggest ways to invest savings for maximum returns, all without disrupting daily spending habits.
• Open banking has transformed online payments, offering a safer and more convenient alternative to traditional methods like credit and debit cards. This shift became particularly valuable during the COVID-19 pandemic and is here to stay.
• Unlike card payments, which can be prone to issues like expired or lost cards, open banking payments function like instant bank transfers with lower failure rates and faster settlements. These transactions are processed in real time and follow strict security protocols, reducing the risk of errors and eliminating excessive fees. This provides you with greater peace of mind, knowing well that your money has safely reached its intended destination.
• Payments must pass through Strong Customer Authentication (SCA) protocols, which add an extra layer of security to reduce fraud. This process typically involves redirecting the user to their bank’s app or website, where they confirm the transaction directly. The key advantage is that no credentials, like passwords or account numbers, are shared with third parties, making the transaction more secure while also ensuring that you’re in charge of your financial data.

Benefits of Open Banking for Businesses:

• Open banking serves as opportunities for businesses, especially the SMEs, to enhance their payment processing, financial analysis, and other services that are typically only available to larger corporations.
• Open banking enables businesses to automate and streamline their financial processes, such as accounting and compliance, by providing real-time access to bank data. The automation helps reduce manual data entry, minimizes errors, and speeds up tasks like reconciliation and reporting.
• It also helps businesses and organizations stay compliant with regulations by ensuring accurate and up-to-date financial records which allows them to focus more on growth and less on administrative tasks.
• In addition to significant efficiency benefits Open banking offers to small and medium-sized (SMEs) businesses, it helps simplify their financial management. Tasks like accounting and payroll become easier through access to real-time financial data, allowing business owners to outsource these responsibilities to third-party providers and focus on growth areas like marketing and customer experience.
• With a clear, centralized view of their finances, businesses can better plan for the future, identify inefficiencies, and spot opportunities. The more comprehensive the data, the more effectively owners can make informed decisions and optimize their operations.
• Open banking also helps businesses, especially the business banking and commerce, tap into new sources of financing which helps increase revenues. It also helps businesses to detect and prevent fraud e.g card chargeback from existing or potential customers.
• Open banking technology helps businesses build more accurate credit risk assessments by centralizing their financial data. This improved reporting makes it easier to access credit for maintaining cash flow or securing investments, as lenders can more easily evaluate the business’s financial health.
• Open banking helps merchants lower costs by reducing their reliance on card payments, which often come with high service fees. With open banking payment APIs, transactions are processed directly between banks, eliminating card processing fees and reducing many operational costs. This results in significant savings for businesses, allowing them to keep more of their revenue.
• Open banking provides a well-designed checkout flow with multiple payment options for businesses. This helps enhance customer satisfaction and reducing shopping cart abandonment. With enhanced multiple payment options for customer, more sales are possible and higher revenue is also possible for the business. In other words, when customers find the checkout experience easy and flexible, they are more likely to follow through with their purchases.

Benefits of Open Banking for Financial Institutions:

• Open banking gives legacy banks the opportunities to leverage their existing users base and data to develop new products and services. In other words, the customers’ data collection privileges they have enable them to streamline those data and use it to improve their new products and services in terms of customer wants.
• Open banking gives legacy banks the opportunity to compete with FinTech companies and other new players in the financial market. With the introduction of regulations like PSD2, which ended banks' monopoly on consumer financial data, many feared traditional banks would be on the losing side. However, open banking allows these institutions to adapt and innovate by partnering with FinTechs and leveraging new technologies. This collaboration enables them to offer more competitive products and services, improve customer experiences, and remain relevant in an evolving financial landscape. Rather than being displaced, banks can use open banking to stay at the forefront of the industry.

Is Open Banking Safe?

Yes, Open Banking is safe. It’s a systems that allows you (as a consumer) to securely share your account information. As a business, it let you use your customer data to improve your services and as a bank, it let you meet up with industry standards by leveraging your services to the next level.

However, despite all these advantages open banking brings to the table, it’s also important to know the risk of the banking concept. First challenge is that regulated markets, such as those operating under frameworks like PSD2, may find it difficult to innovate rapidly.

Strict compliance requirements can slow down the development of new products and services, making it harder for companies to adapt and grow. However, failing to meet these regulations can put businesses at a competitive disadvantage, as consumers are increasingly drawn to companies that offer transparency and security.

Despite these challenges, the opportunities and benefits of open banking are significant for financial institutions, businesses, and consumers. By overcoming regulatory hurdles, companies can provide better services, build customer trust, and gain a competitive edge. Ultimately, the potential rewards far outweigh the risks, as open banking continues to reshape the financial landscape.