What Is Open Banking

Financial institutions that want to develop in their sector should support Open Banking initiatives with secure data exchange.

Financial institutions that want to survive should adapt open banking innovation.

The Power of APIs: Open Banking is redesigning the Finance Sector

Open banking is the system where financial institutions publish financial data (APIs) to third-parties, including specific standards. Fintechs, known as third-party service providers (TPPs), make the lives of both customers and financial institutions easier by developing new and creative business models and applications through these APIs. Thus, the entire financial sector, especially banking, design a unique ecosystem with the power of open banking.

The two most significant factors in the advancement of open banking are innovation and regulation. As fintechs develops innovative applications, regulators have set standards that ensure that it is safe and protected. The leading open banking standards are the England-based Payment Service Directive (PSD) and Germany-based Berlin Group Standards. The regulations redefined the integration structures securely to strengthen the link between fintech startups and financial institutions, enabling banks to become platforms and create unique ecosystems by developing new partnership strategies.

There are two open banking primary services. The first is "account information services" (AIS). With this service, fintechs provides customers access to their bank accounts with different applications. Account aggregation enables customers to see bank accounts and transactions in one place, for instance. The second leading service is "payment initiation services" (PIS). It is the service that manages the payment between the bank and the seller during online shopping. An example of this is letting customers pay directly from their bank account. Third-party providers must obtain the customer's consent and approval through the banks' APIs to conduct these open banking transactions.

Open banking showed its effects on a global scale with the innovations and regulations it brought. All financial institutions have to adapt to this leading transformation. Open banking is more than a necessity arising from innovation or regulation; it is the most critical development that designs the banking sector's future. Open banking, which is beginning to mature worldwide, will lead to a significant transformation by enabling new business models for every country's financial services.

Open banking brings financial services to a level accessible to all people, allowing individuals to make transactions in more than one bank or financial institution simultaneously. It becomes an important tool to improve the customer experience as well as for financial inclusion.

Open banking will help financial institutions improve compliance, scalability, innovation, and competitive advantage. It will help create new business models and use cases that expand in scope and capability as organizations increase their API maturity level. Financial institutions that invest in this field will be among the players that shape the future's financial world.