Open banking: what is it and what are its benefits?

In today's digital era, the openness of the banking infrastructure has helped many players to pursue their financial goals. This concept, known as open banking, has seen significant growth in recent years.

But what exactly is open banking and how can it benefit both consumers and businesses? In this article, we will explore the definition, benefits and workings of open banking.

What is open banking?

Open banking, also known as open banking, is a financial practice that allows third parties to access the financial information of a bank's customers through application programming interfaces (APIs).

This means that financial institutions, such as banks and other related companies, can share information securely and efficiently with other companies or applications, always with the customer's consent.

Open banking increases business opportunities for banks and other financial service providers. But, at the same time, it poses a great challenge for the entire industry, which will have to face a disruptive model that will completely change the banking paradigm in the near future.

PSD2: the regulation that has made open banking possible in Europe

Open banking has been driven by regulations such as the Payment Services Directive 2 (better known by its acronym PSD2), which seeks to increase competition and innovation in the financial sector. This is a regulation that came into force in January 2018, and aims to increase competition and innovation in the payments industry, as well as improve security in online financial transactions.

This new regulation has already been transposed into Spanish law, and allows customers to have full control over who can access their financial data and for what purposes, which increases transparency and confidence for banking users.

Benefits of open banking

Open banking offers a number of benefits for both consumers and businesses:
  • Greater control for customers: Customers have full control over who can access their financial data and for what purposes, increasing transparency and trust.
  • Innovation and personalization: open banking enables fintechs and other companies to develop more customized and efficient products and services, such as personal finance management applications.
  • Competition and better offers: by opening the market to new competitors, customers can have access to better offers and more competitive financial products.
  • Integration and efficiency: facilitates integration between different services and platforms, which can result in a smoother and more efficient user experience.
How does open banking work?

Open banking would not be possible without APIs, which are a kind of "bridge" that allows different systems to communicate with each other securely. In other words, they are the tools that programmers have to develop third-party applications in a simple, fast and transparent way.

This new system works as follows:
  • The process starts with the customer's consent. Before any third party can access the customer's financial information, the customer must give explicit authorization. This ensures that the customer's data is only shared with entities that he or she has approved.
  • Use of APIs: APIs (Application Programming Interfaces) are the key technology in Open Banking. They act as secure bridges that allow systems from different entities to communicate with each other. Banks and other financial institutions use secure APIs to share information with authorized third parties.
  • Development of new services: once a third party has access to the customer's financial data (always with their consent), they can use this information to develop and offer new services. This could include certain personal financial management applications, financial product comparisons, or enhanced payment services.
  • Authentication and security: Security is a key consideration in open banking. Transactions and access to data are protected by robust security measures, requiring multiple forms of verification before information can be accessed or a transaction can be made.
  • Customer control: Customers have the ability to control who has access to their data at all times. They can revoke access whenever they wish, giving them full control over their financial information.
Is open banking secure?

Open banking has generated some skepticism among many banking users, who are reluctant to share their personal data with third parties. The possibility that third-party applications that a priori have little to do with their bank could access sensitive information such as their bank accounts, credit cards or investments is a red line that many customers are reluctant to cross.

Despite this reasonable concern, the PSD2 directive has incorporated a set of security elements that force banks and technology firms to adjust their technology. The most important of these is the need for the customer to have to expressly authorize this access.

This is achieved through two-step verification or Strong Customer Authentication (SCA). For all transactions, PSD2 requires at least two of three authentication methods: something the customer knows (such as a password), something they possess (such as a cell phone) and something they are (such as a fingerprint).

But, in addition, the fact that access to user data has been regulated eliminates some techniques that until recently were very common, such as scraping, a procedure whereby applications track customer data by masquerading as a normal user.

In short, it can be concluded that open banking, thanks to the current regulation, is really safe, and that it does not entail any privacy risk for users.