How does open banking work?
Consumers and businesses can authorise a digital app to access their financial data through application programming interfaces (APIs). These APIs allow a company’s software to “plug into” and access information from the software at another company in real-time. Third-party aggregators, like Tink, act as a bridge between account providers (such as banks, brokerages, and credit unions) and the kinds of third-party apps you might use to track your budget, trade stocks or pay back friends, making those services accessible all from the convenience of a connected device.
Open banking gives consumers and businesses a fast, transparent, and accessible way to track, spend, borrow, and invest their money. A small business owner, for example, might connect her business account to her lender to help apply for a business credit card with special offers and rewards, or access a business loan — without having to compile years of statements. She might also streamline backend operations and analyse her finances more conveniently.
Likewise, financial institutions can give their customers better insights and more convenient services through open banking platforms, while fintechs continue to innovate, design and build better consumer and business solutions and experiences through open banking technology.
Trust is foundational to open banking
Open banking is focused on empowering consumers and businesses with better financial services and experiences, all of which start with trust. Trust is built on the value that open banking powered services can deliver by building safe and secure connections. It’s reinforced through transparent consent management practices that give consumers the power to authorise an app’s access to their financial data and withdraw that access at any time.
In 2018, the EU implemented a regulation called the Second Payment Services Directive (PSD2) to help foster innovation and promote competition within the banking sector by opening access to their customers account data to third party service providers. One of the biggest changes brought about by PSD2 is putting consumers in the driving seat when it comes to their data.
Given the positive impact of PSD2 for driving growth in open banking, and the appetite for continued development in this space, the next iteration of the legislation - PSD3 - is on the horizon.
The future of open banking
As consumers, businesses, financial institutions, and governments continue to uncover the potential for open banking, demand for innovative ways to harness data have come to light. Open finance is making broader data, such as from mortgages, pensions, and insurance, more accessible by trusted third parties, with consumer consent. The adoption and expansion of open banking could also mean more opportunities for unbanked communities to engage in a secure global economy. Ultimately, open banking could uplift more communities around the world by helping them better track, spend, borrow, and invest in their future through innovative digital services.
Read more about how Visa and Tink are helping consumers gain a holistic view of their accounts and enhance financial wellness.
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