Three Good Reasons to Embrace Open Banking

Without proper understanding, it's easy to be weary of open banking. I mean, using the words "open" and "banking" in the same sentence is understandably questionable when it comes to your personal finances.

To better understand this concept let's first break it down to its origin. Open banking is the banking subset of "open finance." Open finance is the broader concept that is driving transformation in the financial industry, covering insurance, investments, payments, mortgages, etc. And, open finance is a subset of "open data," a larger technology movement that applies to industry in general.

They are quite similar in nature, but apply to different market sectors. Here is a graphic that outlines this concept nicely:

For a more comprehensive explanation of the origins, fundamentals and security elements of open banking, WWT's Area Director, Security, Global Accounts, Matt Berry lifts the veil rather nicely here.

Quite an evolution

As pointed out in the previously mentioned article, open banking is more of an evolving concept than a push-button solution. While mixed emotions still persist, the industry is evolving its perspective, as well. To see how far we've come, one needs to look no further than the dates and contrary titles of these Forbes' articles:

My, how the tune has changed in just two years' time.

This evident shift in the narrative speaks volumes about how we are usually reluctant, and sometimes scared, to accept major change, but are also quick to come around should this change prove lucrative and convenient, and open banking is no exception.

The thing is, nobody wants any one entity to have too much power, and at first, it seemed open banking was putting too much muscle in the fintechs' hands. As it turned out, the fintechs were going to capture market share from the big banks anyhow, so it became clear that open banking was being falsely speculated against. And with a little time, the light started shining on open banking's true intentions: to create new opportunities and revenue streams, open more financial services options to customers and create a better personal finance management experience for all.

If that's not convincing enough, let's look at 3 good reasons to say yes to open banking…

Reason 1: Sustainable innovation

Open banking offers a way for banks and fintechs to offer sustainability services by using transaction data in a meaningful way. The data that can be acquired through open banking can be used to determine ESG ratings, provide loans to businesses (B2B) and help consumers see their own green footprint from the businesses they're supporting (B2C).

Calculating one's carbon footprint is now a huge point of interest for many organizations. For example, some big banks are teaming up with fintechs to offer their customers a carbon footprint and CO2 emission tracker as a built-in mobile app feature, a possibility made by open banking technology.

The move to be more green in the B2B space has the most noticeable traction, per WWT expert analysis. A perfect example of this is HSBC's new tool that run multiple "what if" climate change risk scenarios on Google Cloud to measure the impact and recovery requirements of climate change risk on its trading book.

Open banking makes it possible to provide services that help people and businesses understand the environmental impact of what they buy, how they behave, and what they invest in, so we all can leave a lighter mark on the planet.

Reason 2: Financial inclusion

Did you know that 10% of the US do not have a checking or savings account? And another 25% are underbanked, which means they use non-bank services to pay bills or cash a check. When COVID-19 happened, we were shown how crucially important it is for people to be connected to a financial infrastructure. State aid was unable to reach those who needed it the most, sometimes taking months to arrive to people who had lost their jobs. It was tragic.

The technology behind open finance and open banking can help us change this. Financial organizations can now use available data to profile individuals that don't have a social security number, passport, or sufficient financial history for various reasons, including being newly immigrated or too young. Open finance technology allows for data aggregation from insurance, mortgages, bank accounts, loans, and credit cards gathered nationally and internationally.

Financial institutions can now reach people who wouldn't be able to otherwise connect, helping consumers with financial independence and diversifying the customer base. Rightfully so, the UN has a goal of, "leaving no one behind in the digital era," and open banking serves as a catalyst to fulfil this goal.

Reason 3: a forced hand for increased cybersecurity

Now that more and more people are using open banking products and services, risks are increasing and manifesting in different areas. APIs connecting users will handle more transactions and be connected to more third parties making them vulnerable to being overloaded or open to malicious activities. According to Gartner, "by 2024, API abuses and related data breaches will nearly double."

Wait…Isn't that a bad thing? Sounds like it, but not with the right perspective. Stay with me.

The intra- and inter-organization connections of open banking is made possible through the use of APIs. This makes APIs the most sought after attack vector, which could lead to data breaches and other major security risks. Akamai has reported $9B+ attack attempts across all industries in H1 2022, a three-fold increase YOY (largest ever seen). This is 100% a bad thing. BUT…

Cyberattacks were on the rise way before open banking came on the scene. The attackers have continued to become more crafty, diligent and aggressive. And yes, open banking may have created more openings to enter, but the treats have always been big and nocuous. But now, there is a clear and quantifiable reason to make strategic investments in maximum cybersecurity across applications, infrastructure and the cloud.

The evolution of open banking technology has sparked an evolution in cyber resilience, breeding plenty of optimal solutions and strategies that give organizations the ability to proactively detect, alert and defend the most vulnerable and precious assets. These were a result of open banking, but were much needed beforehand.

Application security was always necessity, but it was never a major budget bender…until now.

A final note

Banking and finance services are no longer served upon traditional business models. The key objective of 'as a Service' banking and finance is to bring relevant products and services to the market quickly, to help organizations stay relevant and competitive and to bring extraordinary convenience and efficiency to the organizations and their customers.

We may not have seen an explosion in uptake based on what was initially conceived to be open banking, but the success of companies providing targeted or specific service offerings has been, and will continue to be, the engine that drives industry transformation.