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The concept of open banking is to make it easier for consumers to manage their financial lives with the help of third-party apps that are able to access their financial data securely and instantaneously. Examples would be an app that makes splitting expenses with a roommate easier or a budgeting app. Essentially, open banking helps consumers access financial services from a computer or smart device. Most people probably use open banking on a regular basis and don’t even realize they do so. Let’s take a closer look at what open banking is and how it works, as well as what some of the benefits of open banking are.
Connecting a bank account to a lender when applying for credit
Open banking can apply to any type of digital financial transaction. It makes it easier to access financial services and digital banking products through smartphones or other types of devices.
How Does it Work?
The way that open banking works is through application programming interfaces (APIs). APIs make it possible for one company’s software to access information from another company in real time. Essentially, open banking serves as a bridge between two different account providers, such as a bank and a stock broker. This makes it possible for consumers to access multiple financial services at once. Open banking provides speed and transparency for consumers when it comes to how they spend, invest, borrow, and track their money.A major perk of open banking is that as this technology continues to evolve, fintech companies are able to keep building better financial products and solutions for customers and businesses.
The Future of Open Banking
Open banking is expected to continue to evolve as time goes on. Consumers, governments, businesses, and financial institutions can all benefit from open banking. The more people and institutions that use open banking, the more data access increases, and the more progress can be made. For example, there is some hope that open banking can create solutions that help support unbanked communities so that those individuals can participate in a secure global economy. The easier it is for people to track how they are earning, spending, investing, and borrowing their money, the more financial freedom they can achieve and the more progress they can make as a whole. The more trust our society gains in open banking, the easier it will be for fintech companies to create innovative financial products and services.
Open Banking API
An API essentially makes it possible to tap into the software of another company. This is done instantaneously and the API acts as a bridge between the two companies. For example, when using a budgeting app, the app may use an open banking API to connect with the user’s checking account to see how much money is left in their account. It may also connect to their credit card or debit card to see what the user is spending their money on so it can update their budget.APIs save consumers from tedious work, as apps can seamlessly pull vital account information and history instantly. Recommended: Guide to Transferring Money Between Banks
Benefits of Open Banking
Open banking offers perks for both consumers and financial services companies. Some of the benefits of open banking include:
Easy sharing of customer account information amongst partners (with customer consent)
Open banking also has some notable disadvantages that customers can benefit from being aware of. These disadvantages include:
Consumer apathy leads to limitations. The limitations associated with open banking are due to the fact that consumers struggle to fully embrace the potential of open banking due to a fear of sharing data and a lack of understanding of this technology.
Lesspersonal interactions. Now that most financial matters can be handled digitally and traditional banking services are being replaced with fintech products, there are fewer personal interactions between customers and financial professionals. Some people feel more comfortable with face-to-face encounters when it comes to managing their money.
Less data control. While open banking is considered to be very secure, if someone doesn’t like the idea of multiple applications having access to their personal and financial information, they may prefer a more traditional method of money management.
The Takeaway
Open banking is making managing our financial lives easier than ever. Being able to seamlessly connect different financial apps and service providers together can make transferring money, overseeing a budget, or buying stocks fast, secure, and simple. Chances are, the majority of consumers have used open banking at some point in their life and just weren’t aware of it. In many ways, open banking makes it easier for consumers to make progress in their financial lives. Having access to the right financial tools can aid this progress greatly. For example, having a savings account that offers a high APY can make it easier to earn money on savings. For consumers looking to open a high-yield savings account, Lantern can simplify their search. In one convenient place, users can review the current APYs, fees, and minimum balance requirements associated with the different banks they’re considering. Compare high interest online savings accounts and find today’s best rate with Lantern.
Frequently Asked Questions
What is the difference between open banking and traditional banking?
How secure is open banking?
How can I access open banking services?
Photo credit: iStock/Riska
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About the Author
Jacqueline DeMarco
Jacqueline DeMarco is a personal finance writer and editor based in Southern California. While she spends the bulk of her time writing about complex financial issues, she also tackles a variety of subjects ranging from food to fashion to travel. Her work can be found across dozens of publications such as Credit Karma, LendingTree, Northwestern Mutual, The Everygirl, and Apartment Therapy.
