If you’re from the EU, you probably have already noticed that once you try to make a payment online through your bank, you have to provide verification and authenticate the transaction. That’s by design and that mechanism of authentication ensures that fraud is much more difficult to commit, and better financial services are much easier to access. Let’s look at the main benefits of open banking solutions in this article!
What are open banking solutions?
Open banking solutions are tools and software (digital) that allow simple and efficient data exchange between third-party providers (abbreviated as TPP), the client, and the bank. The TPP gets authorized access to the relevant financial information, held by the bank, from the client. This information, such as transaction history or payment initiation, can be used to provide financial services, verify income, identify a person, etc. So, to put it simply, open banking solutions are digital tools for a safe and transparent exchange of financial information.
How do open banking solutions work?
These solutions are created and enabled, following the laws and rules, devised by the governing bodies or legislators in that respective country, region, etc. For example, in the European Union, the operation of open banking APIs (solutions) are determined and regulated by open banking acts and regulations like the PSD2 and GDPR.
By meeting the standards and requirements, set up by these regulations, developers can launch and enable their solutions to work in the real market. Once service providers adopt them, the solution is able to be integrated with the bank and can provide a service. Open banking solutions are usually APIs which are sort of like vehicles for data transport between one computer system and another one.
Let’s give an example. For example, you want to make a payment for your utilities. You can use an app that groups all utility providers in one place and input your consumption figures and proceed with the payment. The service provider connects their service with a PISP (Payment initiation service provider) API. This API is already linked with the major banks that a user may use. Hence, to complete the payment, the user only has to select their bank, authorize the transaction and the payment will be distributed to the utility companies by the app.
Future of open banking solutions
As of right now, these kinds of solutions are implemented in the EU and the UK. It seems that elsewhere around the world, open banking is more or less a concept for the future.
With that being said, there’s no shortage of countries that are slowly but surely making strides to mimic the ideas of the European countries in order to make their own digital payment sphere safer and better.
For the time being, such solutions are used to verify creditworthiness, make payments or find the best possible financial services. Current legislation prevents developers from creating completely unique solutions because they have to work within the confines of the regulations and acts which we mentioned earlier. But it seems that the potential for expansion is great and it shouldn’t be long before the scope of open banking solutions grows even further.