What is open banking? This fairly new phenomenon in the world of financial technology is gaining a lot of traction, but what does it really mean, and how does open banking work? Spoiler: it has more to do with data access than finances and transactions, commonly associated with the term “banking”. Read on to find out more.
Open banking is a new approach to handling banking information. Also called “open bank data”, this strategy lets consumers securely share their financial information with authorized third-party providers like payment services and apps for budgeting. The main goals are greater personalization of financial services and the chance to speed up transactions. A regular bank transfer with traditional banking can get stuck in processing for over a day and the tools offered by bank can be quite limiting, so customers should be allowed to venture outside of these limitations.
Instead of manually connecting the dots and clicking on checkmarks in multi-stage banking transactions, open banking creates a digital infrastructure where access to data is a given. Think of it as the difference between many individual messages in a bank-controlled messenger versus a group chat of your creation. As for open banking pros and cons, the first approach is a bit more rigid, but may feel more secure, where in the second scenario the choice of who joins the “group chat” with the user’s sensitive information is on the user, but the consequent collaboration makes things much easier later on.
The customers having to consent to sharing their data with more institutions for these instructions to interconnect is a concern that always bubbles up during open banking discussions, and “is open banking safe” gets asked a lot. Before sharing financial data, look into security measures used by the third-party providers that will receive it. They should comply with regulatory standards like GDPR and PSD2. Other things to look for are a focus on API security, multi-factor authentication, and encryption for data both in transit and at rest.
It is important to understand that the main juxtaposition is not between bank control versus customer control over data. The definition of open banking does not paint all banks as its counterpart – they are allies. The juxtaposition is between traditional banks that do not subscribe to open banking practices, and the banks that do.
Three groups are involved in the open banking system:
Seeing the difference from traditional banking is the easiest way to understand the inner workings and definition of open banking.
| Aspect | Open Banking | Traditional Banking |
| Data Access | Customer data shared with third parties via APIs | Data kept within the bank’s own systems |
| Customer Control | Customers control who accesses their data | Bank controls access to customer data |
| Innovation | Encourages fintech innovation and new services | Usually limited to bank-developed tools |
| Third-party Services | Supports integration with external apps | Rarely integrates external services |
| Security Standards | Regulated API access with strong customer authentication | Internal systems with traditional security protocols |
| Transparency | More transparent, customer decides data usage | Less transparent, limited visibility on data usage |
| Regulation | Driven by regulations like PSD2 (EU/UK) | Governed by traditional banking regulations |
| User Experience | Often more personalized and flexible | Often rigid and less customized |
So, how does open banking work, really?
Through third-party APIs, third-party providers can access customer data, including information about their financial transactions and counterparties. Banks grant third-party service providers access and control over their customers’ financial and personal data, customers log into their bank using strong customer authentication, give consent for this access, and after that open banking can really happen.
Before any data is shared, explicit customer consent is required. Users must authorise the release of their information to specific third-party providers. Open banking APIs let customers use different services from different providers, but they also need customers to share their data. This may make some customers wonder “is open banking safe”? Providers must teach and tell the customers about the good and bad things of open banking, as well as what they can and must do.
Third parties can make new transactions and account changes on the customer’s behalf. Here’s how the process looks chronologically:
So, what is open banking adding into the world of modern finance? It will be easier to split the answers into sub-categories: customers, financial institutions, and third-party providers.
Here are the perks of using open banking for business and personal purposes on the consumer’s end.
These are the benefits of open banking for banks that agree to participate in this system.
For third-party providers that are on the receiving end of customer data, the advantages of open banking are also pretty clear.
Let’s delve into some real-life case studies that showcase the practical applications of this technology. These examples of open banking highlight how this financial innovation is making a difference in day-to-day scenarios.
Circit is a good example of using open banking for business. An audit platform, it leverages open banking to streamline administrative tasks for law firms, fund managers, and accountants a payment. By speeding up key processes, they enhance efficiency and accuracy in financial administration.
This platform expands access to loans for HEY Credit Union customers. By utilising open banking, they assess and fund member loans more swiftly, benefiting credit card union members.
Deutsche Bank has partnered with Deposit Solutions to create an exclusive retail deposit marketplace – a pioneering move among major global banks, which aligns closely with the open banking meaning. Through its white-label solution called “ZinsMarkt,” Deutsche Bank now offers deposit products from other banks to its own customers.
This marketplace seamlessly integrates with Deutsche Bank’s online banking and is also accessible through client advisors at the bank’s branches. With the potential to reach seven million German retail customers, Deutsche Bank strengthens its position as a central digital platform for all its financial service requirements.
Decided to give open banking a try? These should be your first steps:
After these steps are complete, the setup process is over, but there are also some ground rules to keep in mind to make the experience continuously safe.
The open banking meaning will be the same in different parts of the world, but the regulatory frameworks that surround it all vary across regions. The most well-known examples of open banking regulations in Europe are PSD2, PSRs, and OBIE.
PSD2 (Revised Payment Services Directive) is a set of laws in the European Union (EU). It improves payment services for consumers this by:
With PSD2, banks in the EU must let their customers safely share data with other companies. PSD2 started on November 25, 2015, and EU countries had until January 13, 2018, to make it a part of their own laws.
In the UK, open banking has evolved through various initiatives like PSRs and OBIE:
Learning the open banking meaning and its inner workings is paramount to be truly caught up on modern advancements in financial technology. Open banking is here to stay, with regulators adapting to technology advancements.
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Open banking is a financial technology framework that allows consumers to securely share their banking data with authorised third-party providers through APIs. It enables faster transactions, personalised services, and integration with budgeting apps or payment platforms. Customers remain in control, deciding who accesses their financial information and for what purpose.
Yes, open banking is safe if providers follow strict regulations like PSD2 and GDPR. Security relies on API protection, multi-factor authentication, and encryption of data in transit and at rest. Customers must always give explicit consent and can revoke access anytime, ensuring transparency and control over their financial information.
Open banking enables startups to build specialised services like budgeting apps, instant payments, and lending platforms. It creates a more competitive landscape, expands consumer choice, and encourages banks to enhance offerings.
Open banking for business improves efficiency, reduces processing delays, and supports integration with modern financial tools. It strengthens competitiveness, customer engagement, and market expansion opportunities.
