Open
banking is a system that provides a user with a network of financial
institutions’ data through the use of application programming interfaces (APIs)
which are a kind of ‘go-between’ that enables a software program to interact
with other software. In the context of trading, an API often refers to the
interface that enables your software to connect with a broker to obtain real
time pricing data. According to the study, ‘Open Banking
– Thematic Research’, open
banking will give consumers the power to grant third parties the right to
access their account.
Not
only will open banking benefit people, but it will also be a booster and major
source of innovation to the banking industry. For instance, open banking APIs
can facilitate the sometimes-onerous process of switching from using one bank’s
checking account service to that of another bank. The API can also look at
consumer’s transaction data to identify the best financial products and
services for them, such as a new savings account that would earn a higher
interest rate than the current savings account or a different credit card with
a lower interest rate. Open banking could also help the consumers get a more
accurate picture of their own finances before taking on debt.
The
utility of open banking through apps is also under research and development. An
open banking app for customers who want to buy a home could automatically
calculate what customers can afford based on all the information in their
accounts, perhaps providing a more reliable picture than mortgage lending
guidelines currently provide. Another app might help visually impaired
customers better understand their finances through voice commands.
The
system that helps the customers will also assist the lenders. Through the use
of networked accounts, open banking could also help lenders get a more accurate
picture of a consumer’s financial situation and risk level in order to offer
more appropriate loan terms. Open banking also has the possibility of helping
small businesses save time through online accounting and help fraud detection
companies better monitor customer accounts thereby identifying problems sooner.
All these features are helping open banks gain popularity and they are being
approved in some parts of the world. In January 2018, after an extensive
two-year planning period, the Payment Services Directive 2 (PSD2) arrived in
Europe. This directive has forced European banks to open up their APIs to
financial technology and finance companies. Now, the ability to directly serve
and add value to customers will no longer be owned by banks but shared with
tech companies and telecommunication firms. This technological upgrade has been
longed for by European customers for a long time evident by the fact that more
than one-third of European consumers say that they would change their bank if
it did not offer them up-to-date technology.
Open
banking is changing the banking industry and is making the customers and
institutions interact in a very different manner. This new technology is
creating competition for traditional banking institutions whilst maximizing
customer satisfaction by catering to varied needs even by means of apps. The
PSD2 has grabbed the attention of the global banking sector and changed the
game for banks in Europe.
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