Open Banking is when banks and other financial institutions allow other companies access to banking information (data) securely. These companies can provide several types of services like payments or financial advice thanks do the availability of the data. It’s all about making it easier for different financial services providers to work together and give users give users more options, more integrations and more intelligence.
The concept of Open Banking aims to increase competition and innovation in the banking/finance industry and enables the creation of a whole new ecosystem.
Who are the players involved in Open Banking?
Open Banking permits and facilitates authorised third-party providers’ (TPPs) access to banks customers’ financial data. It enables customers to share their banking information securely with other financial service suppliers (TPPs) through application programming interfaces (APIs) provided by banks, here named service providers (ASPSP).
Here’s a deeper dive into the players:
TPP (Third-Party Providers): These are external entities or fintech companies that leverage Open Banking APIs to offer various financial services to customers. They require customer consent to access their financial data from ASPSPs. They are usually classified in three different categories (may differ from countries):
- AISP (Account Information Service Provider): AISPs offer account information services by accessing and aggregating customer account data from various financial institutions. They provide customers with a consolidated view of their accounts, transaction history, balances, and other financial information. Examples include Plaid, TrueLayer and Yodlee.
- PISP (Payment Initiation Service Provider): PISPs facilitate payment initiation services, allowing customers to initiate payments directly from their bank accounts for goods and services. They provide a secure and convenient way to authorise and initiate payments. Examples include Stripe, Trustly and Apple Pay.
- CISP (Confirmation of Funds Service Provider) (less used) : CISPs offer confirmation of funds services, verifying the availability of funds in a customer’s account in real-time before initiating a transaction. They help prevent insufficient funds and minimise the risk of declined or failed payments.
ASPSP (Account Servicing Payment Service Providers): These are the account-holding financial institutions, such as banks, that maintain customers’ accounts and provide payment services. They serve as the custodians of customer data and provide access to authorised TPPs through APIs.
How is it regulated?
Open Banking is typically regulated and governed by frameworks such as the Revised Payment Services Directive (PSD2) in the European Union and the Open Banking Implementation Entity (OBIE) in the United Kingdom. These regulations establish the standards, security measures, and guidelines for the implementation of Open Banking which bring trust and security for data owners.
In Switzerland, the provision of access to financial data by banks, similar to PSD2 in the European Union, is not legally mandated. Instead, Open Banking in Switzerland is driven by regulations such as the Swiss Financial Services Act (FinSA) and the Swiss Financial Institutions Act (FinIA). These regulations encourage the exchange of financial information between banks and authorised third-party providers, always with the explicit consent of customers.
The collaborative nature of this field in Switzerland involves multiple stakeholders. One key participant is SIX, the national infrastructure provider for financial services. SIX actively participates in the development of open banking initiatives in the country, working alongside banks, fintech companies (like Sway Finance), and other stakeholders. Their collective aim is to foster innovation, enhance data security, and facilitate the adoption of open banking practices.
Financial institutions in Switzerland serve as custodians of customer data, ensuring its protection and privacy. Authorised third-party providers rely on regulated access to this data to deliver innovative services to customers. Regulatory bodies like FINMA (Swiss Financial Market Supervisory Authority) play a crucial role in overseeing compliance with data protection and security regulations, ensuring a secure and compliant Open Banking environment.
In summary, Open Banking in Switzerland operates through a collaborative effort involving various stakeholders, with the active involvement of SIX and regulatory oversight from bodies like FINMA to safeguard data protection and security.
What are the benefits of Open Banking?
Open Banking allows for the development of innovative services and products that use customer data to provide personalised financial solutions. At a psychological level, it offers customers increased transparency and a sense of ownership by empowering them with control over their financial data. It provides transparency into their financial information in real-time, enabling personalised financial management tools and applications. All while fostering competition in the financial landscape.
It promotes competition by encouraging the entry of new players into the financial services market. It also facilitates accounts aggregation, enabling customers to view and manage multiple accounts from different banks in a single platform. Moreover, it encourages the development of new financial applications and services, such as budgeting tools, payment initiations, investment platforms, and more, by leveraging the data shared by customers.
From a customer perspective, Open Banking provides greater control and convenience, improved financial management capabilities, and increased access to tailored financial products and services. However, it also raises important considerations regarding data privacy, security, and customer consent, which are dressed through robust regulations and security measures.
Does it introduce additional data risks?
Open Banking prioritises security as a fundamental aspect of its framework, ensuring maximum protection for APIs and data handling. Banks and financial institutions have additional measures in place to detect and prevent fraudulent activities. Companies seeking access to consumer financial data undergo rigorous security checks and must demonstrate their security measures to banks. Transparency is a key aspect, as companies are required to inform consumers about the use and of their data and its duration.
While Open Banking offers several benefits, it also comes with certain consumer risks at the data level such as data privacy breaches, unauthorised access, data misuse and errors in data aggregation. Regulators and institutions establish standards, and customers should use strong security measures, review permissions, and report suspicious activities. Consent flow plays a vital role, ensuring explicit and granular consent, revocability, transparency, and strong authentication. It empowers customers and drastically reduces the risks, but vigilance remains crucial.
All-in-all
Overall, Open Banking represents a significant shift in the banking industry, enabling collaboration between banks and third-party providers to deliver enhanced financial experiences and drive innovation in the financial services sector.
This access revolutionises the way solution providers can interact with users’ financial information and unlocks a multitude of data-driven features. It has empowered numerous startups to create an open finance ecosystem, offering a wide range of services previously inaccessible to small and medium-sized businesses. This regulatory change has opened up new opportunities and paved the way for innovative solutions in the financial industry.
At Sway Finance, we specialise in empowering small and medium businesses with a real-time cash management system, leveraging the capabilities of open banking. Our mission is to provide our customers with the means to have constant control over their business finances, equipped with robust tools and up-to-date data. By harnessing the power of open banking, we offer business owners a centralised hub that encompasses all cash-related operations.
With our solutions, business owners no longer need to navigate multiple platforms or systems for their financial administration. Instead, they can rely on our comprehensive platform, which acts as a single source of truth for their cash management needs. This consolidation streamlines operations and ensures that accurate and relevant information is readily available in their pocket.
Through our real-time cash management system, small and medium-sized business owners gain valuable insights and control over their financial activities. They can make informed decisions, optimise cash flow, and monitor their business’s financial health with confidence. By leveraging the capabilities of open banking, we empower our customers to take charge of their finances, paving the way for sustainable growth and success.
