The regulator and the market itself, both banks and fintech services, are looking for the best options for the implementation of the Open Banking concept and the use of Open API technology. What is Open Banking and Open API and what advantages these technologies give banks and their clients?
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Open Banking and Open API – what is this for?
Open Banking is a concept that can be used to create your own ecosystem. One in which banks provide access to data and services to third-party companies. In turn, banks will be able to use the data to analyze and distribute products. One of the key advantages of Open Banking is the ability to deploy the banking service to the client and offer more services in a more convenient format. Thanks to Open Banking barriers to entry into the financial sector are being reduced for third-party companies, and competition in the market is being stimulated.
Open Banking is based on Open Data and Open API. Open Data is the principle of open access to data. Such data – whether it is currency exchange rates and ATM lists or depersonalized transaction data – are accessed by external developers. API (application programming interface) is a program interface that allows one computer program to “communicate” with another. The Open API, in turn, is a publicly available set of software tools that allow interaction between applications. Thanks to open interfaces, third-party developers can access the functionality and content of a particular resource and use it to partially integrate or create own applications.
The benefits of the Open API
Open interfaces in banking are often viewed with skepticism. The approach continues to evolve across all key financial markets – its potential benefits outweigh its possible disadvantages.
For clients (both individuals and legal entities) Open Banking means improvement of the quality of services. This can include, in particular, the following:
- More sophisticated and “user-friendly” interfaces, increasing the speed of all processes.
- Expansion of the product line and convenient search for advantageous offers, for example, deposits.
- Access to credit product expansion (by accelerating the analysis of transaction data and increasing transparency of borrower scoring).
- Personalization of product offerings (through deeper analysis of financial habits and behavior).
- Maintaining personal finances and analyzing accounts from different banks on the same platform.
Benefits of open interfaces for banks
Benefits of open interfaces are not so obvious at first glance. The customer has more options for selecting products and changing providers, so banks need to do more to stay competitive. Nevertheless, banks themselves can benefit from the implementation of the Open API:
- The digitalization of banking services may lead to an increase in revenue through the expansion of sales channels and new monetization options.
- Open Banking can improve customer engagement and allow companies to offer more additional services to customers.
- Open API will allow financial institutions to collect and analyze more information about customers and offer them personalized services, which can have a positive impact on revenue.
- Deeper scoring will allow banks to issue more loans at favorable rates, which may attract an additional audience.
- Once they have invested their resources in the development of the Open API, banks will be able to take advantage of innovative solutions without additional IT development costs.
Open API in the world – what is the situation in foreign markets?
The most famous approach to regulation in the field of Open Banking is the European one, which is based on the payment directive PSD2 (Payment Services Directive). The first version of the directive was adopted in 2007, and offered rules and guidelines for the effective development of payment services in the European Union. However, with the development of technology, PSD has become insufficient to guarantee consumer safety and at the same time to encourage innovation and competition.
U.S. law does not yet regulate the implementation of Open Banking. The only legislation that is relevant to this concept is Section 1033 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 1033 is stating that financial institutions must provide certain financial and transactional information to users of a product or service upon request, but does not oblige banks to provide this information to third parties.
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First published in RUSBASE, a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.
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