A talking point of many current and underlying FinTech trends of the past decade or so has been the democratization of certain aspects of Finance; for example, Robinhood prides itself on the democratization of investing and trading, while other platforms such as Paypal pioneered the democratization of all financial services including payments, budgeting, and charitable giving. Open Banking as a concept democratizes open access to banking, transaction, and other financial data from banks and other financial institutions through application programming interfaces (APIs). Some startups that utilize open banking today include Mint and Plaid, which consolidates data from other financial institutions into one place and facilitates banking transactions through plug-and-play APIs, respectively. Open banking has many wide and varied applications within Fintech, but also has its downsides.
There are many benefits to open banking in its applications. First, open banking and its accessibility to third parties allows for many loan services to help borrowers secure better offerings as well as make these lending decisions more efficiently and quickly. For example, a loan provider would be able to request transaction and payment history from a financial institution directly through an API in order to make an informed decision more quickly; accessible data also allows for manipulation and handling through predictive Artificial Intelligence models that can predict and assess consumer behavior. Also, borrowers can get a better understanding of their own financial situation before taking on a loan or taking on debt. Open banking also facilitates the automation of certain financial processes — say a home owner is planning on refinancing their mortgage: Open banking allows for the automatic consolidation of relevant data to help the borrower make the best decision for their future. Furthermore, open banking stimulates innovation; by making financial data more accessible and available, startups are incentivized to innovate and iterate on existing tools.
Open banking also has implications for corporate systems. With new regulation being introduced (Payment Services Directive or PSD2 — requires banks to expose open banking API access to authorized third parties), open banking is gaining momentum as a tool for large investment banks to appeal to consumers. Sairam Rangachari, Head of Open Banking, Treasury Services at JP Morgan, is quoted as saying “We are looking at how we can also take our banking products to our customers, even if they are not on our website. I think APIs are going to create a faster, more efficient way of doing this.” Open banking can assist in treasury services by automating invoice approval, vendor preferences, real-time payments and similar processes. This allows for more centralized and streamlined experience native to existing Treasury processes.
While open banking is transformational and essential in many areas, it also has its negatives. First, while PSD2 has recently passed, there is still a general lack of regulation surrounding open banking data and consumer data standards. Furthermore, consumers should be wary surrounding the idea of sharing one’s financial data online. However, many fintech startups that utilize open banking have precautions and rules in place to mitigate against breaches and data leaks. Ultimately, open banking has substantially simplified and accelerated many financial processes under the FinTech umbrella and should be supported in the future.
Disrupt is Northeastern University’s FinTech Initiative. To learn more about us and check out our offerings, find us on Instagram at @neudisrupt or on LinkedIn at Disrupt — The FinTech Initiative at Northeastern University.
Written by Greg Guo, a third-year student at Northeastern studying data science and finance.