Open Banking – Meaning, Need, Advantages and Disadvantages

The field of commercial banking is undergoing many technological changes simultaneously. Open banking is one such technological change. Open banking is unique in the sense that this change has been initiated by regulators in most parts of the world.

Generally, technological changes are adopted by commercial banks themselves with a view to increasing their productivity or their competitive advantage. Hence, such changes are often voluntary. On the other hand, since open banking is required by regulatory agencies, it is mandatory in many parts of the world.

In this article, we will have a closer look at the concept of open banking as well as its impact on corporations in particular.

What is Open Banking?

It has traditionally been the responsibility of commercial banks to guard the customer data that they have on hand. Hence, any sort of sharing of data was traditionally prohibited. This has changed with the introduction of open banking.

Open banking enables effortless and secure sharing of data amongst various regulated service providers. This means that if another entity is registered with the regulator, commercial banks can use technological tools such as APIs in order to facilitate the easy and effortless transfer of data with such entities.

The objective of open banking is to facilitate faster and more secure services for corporate customers by facilitating the effortless transfer of data between commercial banks.

How Does Open Banking Help Corporates?

Open banking is helpful to corporate customers since it provides them with more alternatives. There are many fintech companies that are creating top-notch services in the front end. The user interfaces are very friendly and they are using analytics to target better customers. However, they are not able to fulfill many transactions faster because of the lack of information.

Open banking allows different banking entities to operate as one integrated system. This means that there is a free flow of information between different entities.

Advantages of Open Banking

Open banking has become extremely popular amongst corporations as well as amongst commercial banks because of the several benefits that it offers. Some of the main benefits have been mentioned below:

1. Seamless Coordination: The technology that enables open banking is very fast and smooth. As a result, it enables a seamless connection between commercial banks and the fintech companies that provide such services.

   Hence, from a customer’s point of view, there is very little difference in whether the service is being directed by the bank or whether there is a third party involved.

   Corporate customers get the benefit of a technologically advanced interface provided by fintech companies whereas, at the same time, the backend transactions are managed by the robust information systems of commercial banks.

2. Additional Revenue Stream: Commercial banks have also been very open to the idea of open banking. This is because of the fact that every time a transaction is processed using their information systems, they get to charge a fee.

   Hence, this becomes an additional source of revenue for the commercial bank. Also, since this source of revenue is not based on interest income, it helps banks diversify their earnings to a large extent.

3. Lower Transaction Costs: The transaction time and costs of availing of financial services are greatly reduced by the usage of open banking architecture. This is because the information is easily transferrable between commercial banks and other financial entities.

   Hence, the amount of paperwork is drastically reduced as well the time taken to provide the service is also cut down significantly.

Disadvantages of Open Banking

There are always two sides to every technological advancement and open banking is no exception. There are many disadvantages associated with it. A couple of the important ones have been listed below:

1. Risk of Data Leakage: Open banking relies on the extensive transfer of banking data across various information channels. Commercial banks and other finance-related entities are supposed to continuously transmit data to each other using digital APIs.

   However, the higher transmission of sensitive data creates a possibility that such data may be hacked. This can be very dangerous and expensive since the hacking of banking data can cause significant damage in monetary terms.

2. Ambiguity About Ownership of Transactions: Also, when it comes to open banking, there is ambiguity about who really owns the data of the customer.

   It is common for commercial banks and other financial entities to form a chain of intermediaries when open banking transactions are being conducted.

   Hence, the data may be passed from one entity to another. These entities may lie across international borders and hence may be subject to different jurisdictions as well. This creates a very complicated scenario because if the data is compromised at any point in the chain, there is always ambiguity about who is liable for the data leak. Since the liability is not known, it becomes difficult to compensate customers.

The bottom line is that open banking is a relatively nascent technology that has grown rapidly in the recent past. Since this technology is being mandated by regulators in many parts of the world, it is likely to grow even faster in the future.

It becomes important for commercial banks to be the frontrunners in the adoption of this technology. This is because the commercial banks who make an active attempt to adapt such technologies are likely to gain more market share than banks that resist it.