‘Open Banking’: Would you choose speedier banking services over keeping your data secure?
Know the risks and perks of ‘Open Banking’, which is fast becoming a global phenomenon
Dubai: When you last applied for a loan through traditional banks, you had to gather all the paperwork involved in proving your eligibility for credit and all the documents from various sources.
Now, let’s say you could provide that information — your recent financial history — at the click of a button. This is where ‘open banking’, which is now turning rampantly popular worldwide, comes of use.
“Open Banking eliminates the need for borrowers or lenders to manually compile, send and verify bank statements and pay stubs and can result in faster, more streamlined applications and lending decisions,” explained Dubai-based banking analyst Rupesh Naish.
“Sharing access to your bank account information can also allow you to access new, tailored and more relevant financial services that improve your control over your data.”
How can ‘open banking’ be useful to us?
For example, many of us hold accounts at different banks or brokerages. Open Banking allows you to aggregate the information for all those accounts into one real-time dashboard of your choosing, so you can see all your money in one place.
Adoption of Open Banking does come with risks for consumers, though. Data security, privacy breaches, fraud and cybercrime rank among the biggest concerns, particularly as more players in the financial services sector embrace open banking.
"Open Banking is fast becoming a global phenomenon," wrote analysts at UK-based accounting giant Ernst & Young, in its recent research note.
"Fueled by regulatory action, changing consumer behavior and collaboration by financial tech firms, Open Banking is bringing new benefits to customers and opportunities for the financial services industry."
How can Open Banking benefit us? Here are 6 perks
Open Banking offers an array of benefits for consumers. According to Anil Pillai, a UAE-based banking and forex analyst, here are six of them:
1. When you apply for a home loan, you may be able to grant temporary access to financial documents so you could electronically provide proof of income to a mortgage lender. This avoids the need to send bank statements through a website or by email or fax.
2. Establishing a savings or deposit account might be speedier than in the past because you wouldn't be required to manually enter your financial information.
3. Finding better, more personalised financial products, such as credit cards, might be less of a hassle for consumers thanks to API-powered sharing of financial data.
4. People with little to no credit history might have a better shot at qualifying for loans. That's because open banking may let lenders review information like payroll data or rent-payment history to determine an applicant's creditworthiness.
5. Open banking may provide a clearer view of your finances by pooling data from several sources, such as checking, savings and investment accounts.
6. For businesses, advantages might include quicker payment of invoices, simpler sharing of financial data with accountants and loan offerings better tailored to their needs.
What are primary concerns or risks about Open Banking?
While Open Banking delivers a number of potential benefits and financial services providers insist its safe, this concept also may trigger some concerns. Among them are:
• Data security
“Because you're sharing your financial data with a third party, you may be more susceptible to data breaches,” added Naish.
For instance, your bank may – with your approval – share your data with one of its financial services partners (like a credit card issuer). If that partner becomes the victim of a cyberattack, your financial information could be in jeopardy.
According to another Ernst & Young research, nearly half of the negative comments globally about open banking center on data protection and cybersecurity.
Because you're sharing your financial data with a third party, you may be more susceptible to data breaches
• Barrage of marketing
“Opting in for Open Banking may lead to receiving more product and service offers than you want to receive,” evaluated Pillai.
Why? “Your data become available to more companies that are eager to sell to you. And even if the offers are intriguing, the products or services may not serve your current needs,” he added.
• Lack of regulation
As open banking evolves, companies continue to grapple with how to regulate it. In most key economies worldwide, financial services providers largely oversee open banking on their own.
“Several regulators of financial services have issued open-banking guidelines but thus far haven't imposed strict rules, although that situation could change as open banking catches on,” Naish added.
Key takeaways
Under open banking, banks allow access and control of customers personal and financial data to third-party service providers, which are typically tech startups and online financial service vendors.
Customers are normally required to grant some kind of consent to let the bank allow such access, such as checking a box on a terms-of-service screen in an online app.
Third-party providers APIs can then use the customer's shared data (and data about the customer's financial counterparties). But how useful are customer's shared data to such service providers?
Uses might include comparing the customer's accounts and transaction history to a range of financial service options, aggregating data across participating financial institutions and customers to create marketing profiles, or making new transactions and account changes on the customer's behalf.
There is no denying the fact that Open Banking is a driving force of innovation in the banking industry, because by relying on networks instead of centralisation, Open Banking can help financial services customers to securely share their financial data with other financial institutions.