Technology is driving change in our lives at an ever-increasing pace. The banking sector is no different and has experienced many technological changes in recent years. One of the most significant of these changes is the concept of open banking.

A useful general definition of open banking, according to the Basel Committee on Banking Supervision, is ‘the sharing and leveraging of customer-permissioned data by banks with third-party developers and firms to build applications and services, such as those that provide real-time payments, greater financial transparency options for account holders, and marketing and cross-selling opportunities’.

Open banking, in short, is a system that allows access to consumer banking information and control of financial accounts through third-party applications that lie outside the bank’s organisation. These are typically provided by collaborative relationships with tech start-up companies or online financial services vendors.

Clients are required to grant some kind of consent to allow this access – for instance, you may have to check a box on a terms-of-service screen in an online app. Third-party providers of application programming interfaces (APIs) can then use your shared data for various operations. These include assessing your accounts and transaction history to offer a range of financial service options, aggregating data across participating financial institutions and customers to create marketing profiles, and making new transactions and account changes on your behalf.

Product innovation

These third-party API providers are changing the banking landscape through their product innovation to increase convenience and improve your banking experience. One of the main effects is to increase competition with traditional banks, which is potentially both a benefit and a risk for you as a client. The benefit is that online banking has streamlined the practice of sharing your financial information for various products and services. The risk is that third-party APIs that aren’t as security-conscious as banks could expose you to hacking and information theft. You can avoid this by using only those open banking products that have been tested and approved by your bank.

Recently, the financial technology (fintech) sector has seen the emergence of so-called ‘open APIs’, which offer increased security and convenience. For example, APIs may be used to share your banking data within the bank or with third parties – without having to share login credentials, but with your consent.

What does open banking do for you?

By relying on networks instead of centralisation, open banking can help you share your financial data securely with other financial institutions. For example, an open banking API can look at your transaction data to identify the best financial products and services for you, such as a new account or credit card with a better interest rate.

By using networked accounts, open banking could help your bank get a more accurate picture of your financial situation and risk level, so that they can offer more affordable loan terms. It could also help you to get a more accurate picture of your own finances before you take on debt. If you wanted to buy a home, for example, an open banking app could automatically calculate what you can afford based on the aggregated information in your accounts.

Open banking can help small businesses save time through online accounting. It also helps fraud-detection companies monitor customer accounts better and identify problems sooner. The technology may lead to more collaboration between large, established banks and smaller, more specialised financial institutions. This should result in lower costs, better technology, and better client service.

Benefits of open banking

• For financial service providers 
  Open banking will allow financial service providers to innovate their product offerings to businesses and clients significantly.
  
  
• For businesses
  API innovations will mean more effective and efficient financial tools in your business. This will mean more automation, freeing up more time, doing away with the headaches of manual tasks, and ultimately saving you money.
  
  
• For you
  Open banking will mean better ways to spend, borrow and invest. It brings convenience, cost reduction, personalisation and improved financial decision-making.

Open banking is facing the same challenges every new type of technology faces when changing how things have always been done, including misinformation and lack of trust. In spite of that, open banking is taking off – it is forecast to reach more than 130 million users by 2024.

How does open banking change sustainable business?

The rapid growth of technology in the financial services sector ties into a general shift that clients are making towards using their purchasing and investment power to enable positive social change. These changing consumer attitudes are being led by millennials (aged 18 to 38). A recent study found that 83% of this segment prefer to buy from companies that share their own values.

Generally, millennials are 5 times more likely to buy from a brand that has a clear corporate purpose to take better care of the environment and society. Carbon-intensive industries like coal, oil and gas are finding it harder to raise capital in a world where fintech is seen as a way to save costs, use fewer resources and offer more future-orientated investment opportunities. Global business, according to Bloomberg, will invest $53 trillion (about a third of all global investment) in sustainable investment projects focused on sustainable environmental, social and governance practices by 2025.