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What is Open Banking? Definition, Examples, Use Cases

June 9, 2023|0 min read
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In this post, we will cover:

What is Open Banking?

Open Banking is the structured and secure consumer-permissioned sharing of data via open banking APIs between financial service providers. The definition of Open Banking varies slightly from country to country, but it generally refers to using open APIs to share data between financial institutions and third parties.

Open Banking enables consumers to share their financial data from bank accounts with third parties. This consumer-permissioned data is limited to banking, whereas Open Finance is much broader.

Many organizations use the terms “Open Finance” and “Open Banking” interchangeably. However, there is a small but distinct difference. Open Finance is the next step beyond Open Banking.

Check out this blog post to understand what is Open Finance and learn more about open banking vs. open finance.

Open Banking Benefits for Financial Institutions and Fintechs

Open Banking brings enormous benefits to financial institutions and fintech companies. Why?

  1. Customer-permissioned data sharing via Open Banking is bi-directional. This means that financial institutions and fintech companies receive and share data via an API, setting them up to unlock new value from the financial data. This helps foster innovation and uncover new revenue opportunities.
  2. Open Banking tears down data silos. It provides financial services companies with greater insights into their customers and enables more efficient data sharing across departments. It also helps create a unified approach to digital identity management and reduces data resale and data exhaust issues. This can lead to: 
      • More Accurate Customer Profiles: Financial providers can gain access to real-time financial data from their consumers. They can easily see where consumers are sharing their data and why it is being used. This helps identify product and partnership opportunities.
      • Enhanced Customer Experiences: By putting consumers in the driver’s seat, financial providers can build trust and improve relationships, leading to greater customer satisfaction and loyalty.
      • Personalized Services: By analyzing their financial data, businesses can identify specific customer needs or preferences and tailor their offerings accordingly. For example, a bank may offer investment opportunities to customers who have a higher disposable income, or provide budgeting tools to those who struggle to manage their finances. By offering more personalized services, businesses can create a stronger connection with their customers, leading to increased loyalty and retention.
  3. Open Banking brings added security by replacing sharing credentials (such as username and password) with credential-free, tokenized connections. Consumers must grant permission before their data is shared, including who has access and what data they have access to view. For example, customers setting up a budgeting app can grant permission to share a particular subset of data rather than share everything. By leveraging an open banking API rather than screen scraping, consumers never have to share their usernames and passwords, and financial providers eliminate the risk of sharing credentials. 

Open Banking Benefits for Consumers

Consider your own financial life as a consumer. You likely have a combination of credit cards, debit cards, checking and savings accounts, insurance products, retirement accounts, and more across multiple financial institutions and fintech companies. There’s a lot going on. The typical consumer has an average of 5-7 different financial accounts. And, according to Cornerstone Research, it’s not uncommon for a young couple to do business with 30-40 financial providers. 

Open Banking gives you the ability to access and act on your banking data, such as create a single view of your accounts and even make direct payments from these accounts. You can link bank accounts to loyalty programs, share data with accountants and advisors, and more.

Open Banking also creates more choice in the banking products and services you want to use. Data access and portability make it easier for you to shop around, compare products, and find the right banking solution to meet your needs.

For these reasons, the concept of open banking goes beyond financial institutions and fintech companies. More companies are adopting open finance APIs to build and offer digital products that help consumers and businesses understand their financial lives.

Open Banking Examples and Use Cases

Given all these benefits, it’s no surprise that financial services companies, including Visa and Mastercard, are looking to Open Banking. Here are a few examples.

Example: Capital One’s DevExchange

Capital One launched DevExchange with the motto, “Use our stuff to build your stuff.” This DevExchange offers the ability to verify identity and move money via API calls. They also let third parties connect customers with a view of their Capital One accounts and transactions via tokens rather than credentials. In addition, Capital One gives third parties the ability to create accounts directly within these third-party products.

Use cases include integrating wedding registries with a Capital One account and opening a savings account directly within a money management app.

Example: Citi’s Developer Hub

Citi’s Developer Hub enables developers from various digital companies to connect to Citi via API. Notably, Intuit uses this connection to authorize data sharing with Quickbooks and Mint. Quantas uses it for its credit card offerings. And, SingSaver uses it for Instant Account Verifications (IAV) with Citi cards. The offerings in the develop hub vary by country, but Citi allows account aggregation, access to transaction data, authorization, and reward information in many places. By creating this developer hub, Citi is positioning itself for flexibility and stronger connections for its customers who use third-party apps.

If you want to dive deeper, this post covers more banking API examples to showcase what's possible.

Build for the Future

If you want to be a leader when it comes to Open Banking and Open Finance, the time is now. Many companies are already making waves on this front, and you can be one of them. When you do, you’ll enjoy the benefits listed above and be ready for the future of banking.

Want to take a deep dive into the world of Open Banking? Check out the Ultimate Guide to Open Banking. It includes suggestions about how to get started, as well as original data points you should consider as you build out an open banking strategy. Download it for free today.

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