Were you surprised when that app showed your bank account details or your transaction history? Perhaps you were worried. Weren’t you?
Turns out, you allowed the app to access your financial data when you checked the box under terms and conditions while signing up for the app. Welcome to Open Banking!
Open banking is a new phenomenon in the banking industry. Speculatively, it will disrupt the banking industry and make availing financial services more convenient, by allowing third-party financial service providers, financial institutions, and other banks and non-banks access to consumer financial data using APIs (Application Programming Index). Using consumer’s financial data, banks can offer services and products based on consumer’s financial data. At the same time, Open banking exposes consumers to potential security and privacy risks.
Owing to these threats, blockchain technology, is under the spot light. Itoffers a solution to some of the challenges faced by open banking.
Open banking is driving innovation
Open banking is promising in several aspects. Using Open banking APIs, financial services can collect customer’s personal data to offer relevant financial services or banks can aggregate data to deliver more customized services. Apps can use the data to make changes to data on the customer’s behalf as is the case with some apps.
Similarly, looking at customer’s financial data like transaction history and expanses would allow banks to identify savings accounts that offer with higher interest rate. Open banking APIs may allow customers to switch from one bank account to another bank account instantly.
Prior to open banking, the closest thing that came was aggregation. Certain platforms required a customer to provide their username and password, which allowed apps to screen scrape and provide intended details. This poses potential security risk and exposure of personal data. Moreover, data scrapped with these applications isn’t entirely accurate. Incompatibility of the details with aggregation is yet another challenge the held them back from gaining much popularity. This makes it difficult for customers to get the full picture of their financial health.
With open banking, APIs offer a secure option to share data directly by providing account details. This, however, doesn’t stop APIs from putting customer’s financial data at privacy and security risk.
Open banking will increase competition in the industry, seeking companies to become more competitive, and therefore offer better services and products to keep customers to stay abreast in the market. This would decrease the cost of services. Similarly, network effects could lead to the consolidation of banks and may lead to an increase in prices.
Risks of Open banking
Inevitably, open access to customer data poses risks. NatWest Bank warns customers against potential risks –
- Copycat websites pretending to be third party providers: Anyone with good web development skills and build a website and pretend to be a third-party provider and gather valuable customer financial data.
- Scammers can pose as third-party providers: Third-party have access to essential customer’s data. Scammers can hack into third-party providers and access information. And further, use the data to extort information from customers.
3. Ask for passwords– Presently, third-party can’t direct customers to online banking. Therefore, most likely companies will need to seek password. Sharing password with third-party providers is risky.
Blockchain technology, end to all open banking problems?
Banking and finance are reliant on strong security measures to safeguard data.The industry employs sophisticated regulations and technology to keep customers safe. Blockchain industry is increasingly using DLT (distributed ledger technology) based solutions, which distributes data to several peer computers, instead of keeping it centralized. This makes data less susceptible to hacking and theft.
On the flipside, third-party providers can build D-apps (based on DLT) which will further allow them to boost the security of data. This will create two-layers of hard-to-break security, making it nearly impossible to scammers to get data.