The ultimate guide to understanding open banking

Millions in the UK use open banking every day, but many are still unaware of how it works – therefore at Cardaq we’ve decided to create an open banking 101 overview. In this blog, open banking concepts, principles and developments will be covered so you can fully understand what this exciting area of financial services innovation means for you (and your money).

What is open banking?

In a nutshell, open banking is a simple, secure way to move and manage your money.

Data is crucial to this, with banks and financial institutions requiring large amounts of information to do what they do best. Open banking uses technology called application programming interfaces, or APIs, to facilitate the fluid, secure and near-seamless transfer of this data.

This allows secure financial information to be transferred between banks and authorised third-party providers, with these organisations speaking directly to one another via APIs. In the traditional world of banking, data is often kept in silos between different banks and organisations. To get someone’s data out of one organisation and into another would require numerous manual processes.

Open banking disrupts this with open banking APIs, which allow standardised data formats and secure communication protocols to be used. A level playing field is created which allows multiple banks and third parties to operate under a common set of rules, regulations and technical standards.

The advantages of open banking

This is a move in the right direction and away from the archaic and arbitrary setups of the past. Open banking creates much greater efficiency, allowing banks to execute transactions and oversee tasks at greater speed but without security or accuracy being compromised.

For banks and third party institutions alike, this is creating benefits throughout their shared ecosystem. Open banking personalisation is possible as these organisations have instant sight into accurate, real-time data which enables strategic choices to be made. The depth of this information surpasses traditional financial statements and can support all manner of decisions.

Open banking efficiency is leading to better day-to-day management of transactions. Through the innovate use of APIs, these organisations are able to accelerate data flow, expedite transactions and facilitate quicker reconciliation. More direct payment methods are possible, often bypassing traditional gateways and potentially resulting in lower transaction costs.

However, the real open banking benefits are being seen in the advantages this brings consumers. Open banking means enhanced user experiences, with delays reduced, costs potentially cut and stronger personalisation. Having access to real-time data means banks and authorised third parties can make better informed decisions, giving people the products and services that work best for them.

The use of open banking APIs also has important security benefits. Not only does this mean the ecosystem benefits from better regulatory alignment between all parties and stronger transparency, but consumers have more control over their data – and by extension their money. Open banking consumers are in control of the data they share and who with, as well as the ability to cancel this at any time.

Open banking use cases are transforming how we uses financial services and is enhancing payment reconciliation, credit checks, overdraft solutions, identity authentication, financial management and even down to how we pay our household bills.

Open banking challenges

This new way of transferring and sharing information may be transforming how we use financial services, but that’s not say there aren’t open banking risks or open banking concerns. There is the potential for setbacks like with any new technology, and it’s integration in the wider economy means there is undoubtedly a learning curve.

For one, open banking limitations may come about from mismatches and inconsistencies in how these networks are created. Open banking thrives when banks and third parties are all working on the same level as one another, with APIs that allow for the fluid sharing of data. However, if one link in this chain fails, then this can lead to data breaches or interruptions in the flow of information. Fortunately, many banks and third parties are aware of the importance of making open banking work, and investing heavily in their tech as a result, but open banking is still vulnerable to interruptions.

Additionally, like with a lot of new areas of technology, open banking requires strong skillsets to make it work. Integration can often raise unanticipated technical challenges which require specialised expertise and additional hours to troubleshoot. Should there be an outage, this can make such problems harder to quickly fix, and further hamper customer satisfaction. The design of open banking-optimised models, and alignment with new regulations, can also be a drain on resources for banks and third parties alike.

What’s next for open banking

What is clear, is that open banking is working and 2024 saw UK penetration pass the 10 million user mark. This has put the UK in an excellent position to build on this – open banking has already benefitted from extensive state support, and this looks set to continue, such as through the upcoming Smart Data Bill which could unlock further synergies for open banking.

Like many areas of payments, open banking is still rapidly evolving and there are signs of how this will advance into other areas of finance. The benefits of this technology are already clear, and we can’t wait to see what they bring consumers and institutions alike next!

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