What is Open Banking system ?

• 31 October 2019 | 1060 Views | By Mint2Save

From the evolution of banks to facilitate people to growing usage of ATMs, debit cards, credit cards, and net banking, there have been significant changes in the banking sector of India which have enhanced our banking sector. Recently in 2016, a developing phase in the banking sector came which assisted the corporate world. This change was brought in by the concept of Open banking.

The upheaval in the banking and financial sector has taken the business world by a surprise. From an industry that was dominated by nothing but numbers, documents and the currency kept in the lockers, banking industry now works in coherence with technology. The zeros and ones, accompanied by the global thrust on digital economy, has completely changed the face of banking in less than a decade.

There were complex financial products for retail and corporates, which required an experienced banker and his team of apprentices to simplify to the client. Several hidden terms and conditions had always hit the money adversely.

Majority of the banks have a vertical hierarchical structure, which covers all the aspects, ranging from operations to risk and audits. Further, regulatory restrictions have also favored banks, as new entrants or inter-industry entrants. As a result, we have not seen any retail or FMCG giant venturing into Banking, which has allowed banks to limit the competition between themselves and resist change.

The practices above, are now a story of the past. Enter, Open Banking.

In general terms, open banking can be defined as a new age practice, which tends to shift conventional, non data sharing practice to a data sharing one. As an industry practice, banks used to refrain from sharing the data of customer. Now, they can do the same, provided the customer gives his consent. This democratization of data will allow customers to not only compare fee and services for a particular product across banking and financial sector, but will also create business opportunities for new entrants.

In this article, we shall explore open banking, why it was needed, how it impacts the customers and banks and more.

What is Open Banking?

Open banking refers to a process that gives the platform to share the account details and information regarding a person’s banking transactions with third party users through APIs. This information includes balance in the account, the payments made to others, bill payments, etc. 

API (Application Programming Interface) is a medium through which the user’s information is transmitted or shared in a particular format to the server. When it comes to open banking, APIs are rather open data based. As the name suggests, open data is available for accessing to anyone.

When it comes to banking, an individual or a company financial statements, transactions, etc., shall be available via open API and can be accessed by other banks or fintech startups. This data, shall however be subject to consent of the person or the corporate / company. Moreover, this data shall not be made public for everyone to access.

Via API, open banking becomes a two way business model, where the customer / client shall provide his financial data to the API and in return, he shall be given choices to choose from better services, based on fee, technology used, support etc.

Need for Open Banking

There is no doubt that big players had never let new ones survive or even enter the financial sector. Transparency had been a big question, which had bothered regulators and the customers.

As the era of fintech grew, regulators realized that the big players in banking have become complacent and evading from being customer centric. This would mean that the masses are paying far more for the services offered, than what it actually deserves. This practice has hampered retail customers far more as they have lesser power of bargaining and can access only pre-fabricated products and services.

The framework of Open Banking

There are many certain prescribed rules which are to be followed for the proper and orderly working of open banking. These are :

1. API Standards

       These are the set of rules set for the APIs usage and its working.

2. Data Standards

These direct the system that how it must record the transaction and its details. Since data is at the heart of open banking, following have emerged as the customer’s right: 

• A right to access;
• A right to be forgotten;
• A right to restrict processing;
• A right to data portability; and
• A right to withdraw consent (where applicable).

3. Security Standards

There are chances of hacking or illegal activities and for such there are rules designed to serve the purpose.

Advantages of Open Banking

• Less time consuming

With the introduction of open banking, customers can now easily assess their account data and details as all the operations have become automated. As a result, the time spent by the customers for various transactions gets cut down.

• Reaching to customers

Through open banking, banks have regained control over their customers and their needs. Their needs include financing, transferring, loans providing, various transactions related queries, etc. Eventually, it leads to greater autonomy and the systematic working of services.

• Prospering financial market

Open banking has shown positive results in financial markets. There have been an increase in offers and more connections with the clients as a result of which financial markets have shown positive growth.

• Easy access to third parties

Open banking gives a platform that facilitates and smoothens access to third parties by customers that too beyond the finance industry such as insurance and utilities.

• Cost reduction

Open banking if successfully implemented and followed, will yield better outcomes such as a reduction in the cost of transactions, interest, etc.

Disadvantages of Open Banking

• Complex

Open banking is relatively a newer concept for the customers and investors. Due to the pack of knowledge about the technique, they feel less interested in open banking as a result of which the development and progress in the sector are yet to be made.

• Lacks Credibility 

Open banking initially lacks credibility due to the lack of trust by the users in it. Due to a lack of technical knowledge, they think if unauthorized hacking and sharing of information. They prefer the traditional banking system if transactions. They believe that there is a lack of transparency in the system that misguides them.

• Rural coverage

It will take time for the urban population to be handy with the open banking system. But even if the urban population gets the knowledge of the same,  it would be difficult to cover the rural areas

Participants in Open Banking System

1. Third parties that use the data of customers.
2. Customers who allow and permit the parties to access their data and information.
3. Data attribute providers who act as intermediaries between third parties and customers who hold the information of the account of customers and provide it to third parties.

Threats

• Competition

Open banking faces competition from non-bank institutions or services like Amazon and technology vendors. These service institutions provide innovative offers and tools. This will pose a major challenge and threat to open banking in India.

• Safety of Customer’s information 

Open banking depends on the sharing of account data. Therefore how much information is to be shared and how much should be kept so that they can work efficiently in an open banking atmosphere is also a big challenge for the system.

Opportunities

• Growing digitally

With the invention of the internet, recently more and more innovations and services have been discovered and implemented. Companies are trying to use the internet in most productive eat in order to reduce the time and cost of the customers and consumers. With its development, it presents an opportunity for open banking to make its operations available to the customers so that can replace the old banking techniques.

• Customer’s trust

Services such as Zomato, Swiggy, Ubereats, etc. started providing online transactions, people have started building trust and confidence in the mechanism of online transactions. As a result of this is the biggest opportunity for open banking.

• Discovering more in APIs

APIs are used in almost every search engine including Google and Facebook. But there is a lot that can be done using APIs.Therefore open banking can utilize APIs and can discover more.

Comparison of open banking among different countries

1. The United Kingdom was the first country to adopt open banking and is the most experienced and most proficient in open banking. It is so much well versed and efficient in the business that it dictates the working of the mechanism.
2. In 2016, the US planned to start open banking. It was started by NACHA’s API. There is emphasis laid on open banking and people are encouraged to involve in the mechanism but they are not required to do so.
3. Mexico is critically following the policies and the innovations in open banking standards set by the U.K. Recently, it has been made mandatory to follow open banking.
4. Nigeria adopted open banking in 2018 and is regularly striving for innovation and change in the banking sector. They believe that developments in open banking will not only improve the Nigerian banking sector but the economy as well.
5. Hong Kong announced the introduction of open banking in July 2018. It clearly specified that it is the novel and smart transition in the banking sector of Hong Kong. The progress in Hong Kong’s open banking is rapidly increasing.
6. India has already created a global benchmark for open banking, by introducing UPI payments. UPI is a type of API, which allows instant real time payment services to its users. They can then transfer funds via their mobile to one’s bank account using UPI apps. Several tech and investment giants have ventured in this payment service fintech and Indians are witnessing Google (via Google Pay), PhonePe (via Walmart’s Flipkart) and PayTM (investment by Softbank), and several other new and old players entering this field. UPI has been clocking transactions at an increasing rate and is soon expected to have multi currency options and international availability.

Suitability 

Open banking is suitable for large scale industries that deal with an immense number of transactions on a daily basis. It will reduce cost per transaction and save time.

Conclusion

Though the banking sector has now realized the importance of digitalized and cost-effective techniques of transactions, the road ahead for open banking will not be easy. There are major questions relating to customer’s information and credibility, transparency within the system and if there are chances of unauthorized hacking into the system. 

Many companies have started knowing the scope of open banking and are connecting with it. But open banking will generate revenues and growth prospects when customers will be aware of the system and trust in the mechanism.