Open Banking: The Future of Financial Services

Dharna Rajpal

28 Feb, 2023

The open banking system is mostly used for making payments with the help of safe and secure technology. Many fin-tech companies are embracing the new system and are working to provide consumer-specific financial products and services.

These activities are being performed with the help of user data through the application programming interface. This ensures sharing of a customer’s data in a secure manner virtually between the third-party service providers and the bank. Traditional banks can avail benefits from the use open banking system by assessing the financial data of the customer and suggesting them ideas to manage their funds instead of providing the only service of performing transactions.

With the rise in the number of platforms providing online payment systems and big data analytics in methods of payment, it has increased the use of open banking systems in the global world. Looking at the future of open banking, many of the traditional banks are working hard to understand the new aged payment system.

What is Open Banking?

The other name for open banking is open bank data. It is a process where the bank or a non-banking financial institution provides access to a customer’s banking and financial data, and its transactions to a third party which works as a financial service provider with the help of application programming interfaces. This system will permit the networking of accounts and data across institutions for use by customers, financial organizations, and third-party service providers. The open banking system is an innovative technique which is being used to smoothen and re-shaping of the banking sector in the world.

There are several market forces which are encouraging open banking. These are as follows:

Data Transparency and Security

The chances of data and financial thefts have increased with the use of advanced technology and weak security systems which can be easily hacked by illegal hackers leading to serious cyber crimes. This system needs timely updates, the consent of customers for sharing of their data with the third party and an advanced digital system. People around the globe now prefer to use these fin-tech platforms such as UPI, app wallets, etc., to make payments.

There is a thin line difference between online banking and open banking and people usually think both of them as the same. Online banking is the system where the customer uses the bank’s digital application to get access to their financial data and perform virtual transactions whereas open banking includes sharing of data among banks, non-banking financial institutions, investment institutions, etc with the use of API.

Under the open banking system, security is not a huge concern to the users as they have the right to manage their accounts and have control over the information which they want to share with third party service providers. Customers have the authority to manage the profile and the settings of their accounts. Such service providers have a high level of security systems. The data of the customer is kept in an encrypted form which can be decrypted by authorized people only.

Rapid Digitization of Finance

Almost every person has now access to the digital payment system. The banking and non-banking financial institutions have stated that people are making open bank transactions as the sector is moving towards digitization^[1]. It is making the payment system effective. Good internet connection, availability of smartphones and maximum access of these services to users is making the open banking system accessible to almost all places irrespective of the time. This has improved the payment system by making it real-time.

Growing Customer Expectations

The ease and handiness of computerized transaction processes and faster decision-making on such financial applications are increasing the use of the system of open banking. This has increased real-time payments. Customers are demanding a more secure and future-oriented development in this new payment system. Thus, banks are contacting firms and startups providing financial services to retain their customers and state appealing schemes to attract new customers.

Enhanced Competitiveness among Financial Services

The number of active users using the internet has been increasing day to day. They have been using such services very frequently. Thus, to maintain customer retention, fin-tech companies are working to achieve success by providing a more user-friendly interfaces and experiences. They have been working on managing best practices for easy use of the service.

The financial institutions, with the help of open data of several customers, are promoting schemes and benefits to attract more customers. In order to provide excellent banking use, banking and non-banking financial institutions have started sharing their user’s data easily with third parties to compete in this highly tech friendly competitive world.

 This is also an opportunity for the banks to take this as a source of income generation. For this, the banks are required to form strategies to manage their data and maintain them in a single space, enhancing the efficiency of artificial intelligence and other electronic devices being used by the bank. This will be beneficial for the customers to receive personalized finance-related offers and suggestions.

Way Ahead

In the upcoming years, the open banking system will achieve great success and profit in the long run. This system aims at providing a better experience to the customers so that they can rely on making more online transactions. This service provides users to perform actions faster. This will lead to overall growth and development of the economy and an increase in the spending rate of the customer.

Risks of Open Banking

Nowadays, people have huge concerns with regard to their privacy as it is their fundamental right. While sharing financial data with third parties, the financial data and privacy of a customer are at risk of being misused. Some of the applications might perform fraudulent activities by taking out all the money out of the customer’s account with malicious intent.

There are several unethical hackers who have been committing cyber crimes by hacking the applications and websites of such parties to sell or misuse the customer’s data without their permission. It comes under theft of personal data and private financial information.

Conclusion

In the near future, the open banking system is going to increase competition among companies providing financial services. This in turn will lead to more benefits for customers as these companies will strive hard to retain more customers than their competitors.  It might have a negative impact which would harm the interest of the customers and an increase in the cost of service.

The misuse of a customer’s private financial data will raise huge security and financial concerns leading to an increase in the number of cyber crimes as well. The people might lose interest and trust in such a banking system which lacks proper security systems to save their data.

Also Read:
Development of Open Banking in India
Banking as a Service (BaaS): A Detailed Overview