Open Banking and its importance for financial services
The concept of Open Banking is still very new but is taking Europe and set to completely shake-up the world of modern finance. Though a lot of people heard about it, many vaguely understand what it entails, and how both businesses and customers can benefit from it. So, let’s fill in the blanks with today’s article.
1. PSD2 and Open Banking
If you are familiar with PaysTree social media, there is a high chance that you have already heard about PSD2, which is a Revised Payment Services Directive. Open banking is an initiative that allows broadening customers’ and companies’ usage of more types of financial institutions for a better banking experience. It is achieved by allowing Third-Party Providers (TPPs) securely access the financial data of traditional banks’ customers through application programming interfaces (APIs).
It might sound complicated at first, but Open Banking serves as a way for people and SMEs to discover more convenient and fluent ways to do banking, like using Fintechs and other tech companies. This initiative encourages to set a more competitive environment between traditional banks and neobanks, which, in turn, will drive innovation and technological progress to the industry.
The thing is, your traditional bank might not always have all the instruments you require for seamless online banking, or other financial needs, like budget planning, credit risk assessment, account aggregation, etc.
Though PSD2 applies to the European Union and Great Britain, other countries around the world start implementing their versions of Open Banking, which only shows the idea behind it is substantial.
2. Open Banking API
API is a set of protocols and tools, which are used for data exchange between traditional banks and Fintech companies. The API is what allows you to customise different components of the program to interact effectively. It also contains the terms of this data exchange.
An API makes it easier for programmers to facilitate the development of a particular product. Most large companies develop APIs for clients or for internal use at some point. Using the API, you can implement a variety of functions, that helps you automate tasks, find and share data, and more. Thanks to API, it’s easier for traditional and neobanks to collaborate, which is a good way to combine the best tools from both worlds.
3. Open Banking standard: pros and cons
Like any service, Open Banking has its benefits but still needs to address some challenges associated with it. With that said, let’s first point out the pros of Open Banking:
• The choice is yours. Open Banking gives customers a new push to try out alternative and more relative ways to manage their finances, some will find lower fees at neobanks, others – more agile tools.
• The next level of doing banking. TPPs, which are a part of the Open Banking standard, offer instruments not only for banking but other financial matters, like planning and keeping in check your taxes, comparing products to find the best deal, assessing credit risks, etc.
• A dose of healthy competition. As we have mentioned before, Open Banking encourages to set a more competitive environment between traditional banks and neobanks.
Although Open Banking is one of the driving forces for innovation in the financial industry, there are still some problems it faces:
• The unknown territory. Open banking is still a very new concept, implemented only in 2018.
• Is it safe to proceed? One of the biggest concerns among customers is that Open Banking is prone to data breaches and may be targeted by hackers. It is a real thread, which all the parties taking part in processing clients’ personal information should consider and take safety precautions, so they don’t suffer money and reputation losses in case of a breach. To address the issue, the EU also introduced the General Data Protection Regulation (GDPR) in May of 2018. GDPR has a set of guidelines when it comes to the collection and processing of personal data, aimed at preventing fraud and information breaches.
No matter the issues, the main focus of Open Banking is still pushing the innovation to improve customer services. And when it comes to PaysTree, we follow this strategy as well. We are an electronic money institution compliant with PSD2 and you can easily integrate our API on the website. Skip the long queues, application forms and cut straight to the point with PaysTree.