Studies have shown that 50% of Americans have accounts with more than one bank and 67% of adults living in the UK have more than 3 financial accounts. While maintaining them can be manageable with features provided through mobile applications such as transfers and deposits, it can still be tedious switching back and forth between applications. Open Banking addresses this concern with comprehensive platforms that improve the personal banking experience for consumers.
What is Open Banking?
In early 2018, the European Union revised their Payment Services Directive (PSD2) to foster and regulate an environment of digital innovation. This national regulation requires banks to make their data available to authorized third parties, with the permission of the consumer, who are in the business of empowering consumers to appropriately control their finances. The concept of Open Banking was first introduced in the United Kingdom following the introduction of PSD2. It was introduced because consumers in the UK were frequently subject to overdraft fees, lack of interest payments and overall mismanagement of money. The Competition and Markets Authority (CMA) saw Open Banking as an appropriate solution to these issues, that would also increase competition and innovation in the financial services industry.
Approximately 70 companies have launched Open Banking platforms and have seen success in the past year. Their platforms make use of Application Programming Interfaces (APIs), which is a software capable of interacting with other software. This new market is regulated by the Open Banking Implementation Entity (OBIE) which has indicated growth in the engagement with the concept. While the impact has been nominal thus far, Open Banking is expected to revolutionize the way consumers manage their finances and the financial services industry in general.
What You Can Do to Prepare
As Open Banking is still in the developmental stages, it is mainly available to legal residents of the European Economic Area, Hong Kong and Australia. As the concept continues to advance, it will spread to other geographical areas and begin to expand the basic services that are currently provided. In the meantime, consumers are encouraged to monitor how current users are responding to it and what is being done to address common concerns.
Consumers should also consider how their local banks and governments are responding to digital innovation and the implementation of Open Banking. If they are talking about it, what are they saying? If they are not talking about it, why not? Consumers deserve the best from the entities that represent them and have the right to ensure their interests are being prioritized.
If this is the first encounter you have had with the concept of Open Banking, hopefully it has appealed to you and encouraged you to do some research. Furthermore, if this has not been a topic of discussion in your work or social setting, spread the word! The inevitable structural change in personal finance has arrived and it is time to get excited!