Denis Jakus

making tech less cryptic

CTO x Unique People

Denis Jakus

making tech less cryptic

CTO x Unique People

CTO Note

What is Open Banking?3 min read

06 February 2023 Business
What is Open Banking?3 min read

A few weeks ago I stumbled upon this interesting article: regarding future technology in banking. That future technology is called “Open Banking”.

Definition of “Open Banking”?

In short, the practice of allowing third-party services to access banking data to third parties is known as open banking.

Open Banking is an umbrella term for a variety of technologies that link banks, Electronic Money Institutions (EMIs), and third-party services through Application Interfaces (computer applications where the Interface is called a formula). Basically, it’s a new enterprise branch that encompasses a variety of financial services, making the banking business cheaper and more accessible for the global citizen.

Several countries and areas in the EU and the UK are years ahead with highly advanced technological progress and applications in the field of financial services designed to reduce transaction costs, improve processing time, and automate personal and commercial financial assistance.

This service is NOT currently mandatory, and no institution is enforcing it. Anyone’s data is displayed via APIs, and the customer’s consent is the commissioned factor.

Some stats about Open Banking which I copy-pasted from the above mentioned article:

  • Some 4.5 million regular users of open banking of which 3.9 million are consumers and 600,000 small businesses.
  • A 60% increase in new customers (up from 2.8 million in December 2020).  One million new regular or active users are added every six months.
  • At the end of 2021, cumulatively over 26.6 million open banking payments had been made. This is an increase of more than 500% in 12 months.

It’s a no-brainer that we see a decline in cash payments and growth in e-commerce. The overall aim is to reduce the costs to merchants associated with card payments.

What does Open Banking enable us to do?

It enables all sorts of financial applications to be developed using Open Banking’s account information data-sharing functionality.
This includes:

  • Services to establish the affordability and eligibility of a loan in mortgage application comparison.
  • Services that identify the best bank accounts for small businesses.
  • Services that alert customers to potential cost savings, for example, that their mortgage has switched from a fixed to a floating rate.

The article that I recommend reading also reported that the UK’s Natwest Bank was the first to integrate a service known as a Virtual Recurring Payment (VRP) through an Open Banking framework that exchanged data between a financial institution and 3rd party services that yielded a variety of “automated” payments and services like:

  • automated payments for electricity bills, up to £100 per month;
  • connecting a bank account to a social network app for in-app authentication of payments;
  • setting a limit of six months of payments for a new subscription;
  • automated payments of ride-hailing fees, up to £45;
  • one-time payment set-up for one-click payments offered by an online marketplace;
  • using a third-party smart saving app to move money between bank accounts to a savings account on a flexible/variable basis;
  • using a third-party service that monitors bank accounts and maintains a threshold balance, or helps avoid overdraft fees by moving funds as and when required between accounts;
  • obtaining short-term credit to avoid overdrafts, then automating repayments to credit to minimize overdraft fees and borrowing costs.

There is enormous potential to get rid of clunky currency exchange infrastructure in order to get rid of something far better for the individuals who do business across boundaries.

Nonetheless, there are a certain amount of risks involved in this technology.

Exchanging of this kind of data poses a threat to financial fraud online due to the lack of regulations for fintech companies and the fact that many of these companies are still startups and thus lack the necessary infrastructure to ensure the data security of this type of information.

More about these risks is read in the original article.

Know what’s going on.

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