What is Open Banking? And how will it affect your business?
Open banking is a global trend that is empowering banking customers, creating new possibilities for how they can use their banking data, and ultimately simplifying their life.
For businesses, it’s a treasure-trove of opportunity.
Traditionally, banking has been a very slow-moving industry. And from the clients’ perspective, it’s not exactly interesting, let alone exciting.
But nowadays there is a myriad of different trends driving innovation within the industry. Things are moving at a much faster rate. Consumers and businesses are increasingly noticing how banks and fintech companies are offering new ways to save money, make faster payments, manage money easier, and more.
Those businesses that understand the driving forces behind innovation will be the ones who benefit the most. Open Banking is one of these driving forces.
So, what exactly is Open Banking?
I’m glad you asked.
Open Banking Explained
Open Banking generally refers to the ability of banking customers to authorize third-party companies to access their bank account data to either collect account information and/or to initiate payments.
While Open Banking allows third-party companies to develop better finance applications, it places added pressure on banks to improve their offerings. Therefore, Open Banking cultivates increased competition in the banking industry – forcing incumbents to either enhance their financial services, partner with Fintech startups, or die off into irrelevance.
Specifically in Europe, one of the main forces pushing the Open Banking trend is the implementation of the European Commission’s second Payment Services Directives (PSD2). This is the European regulation for electronic payment services that is forcing banks to make bank account information accessible and to open up their payment services to other companies. The purpose of PSD2 is to make payments more secure, boost innovation, and help banking services adapt to new technologies.
Here are a few examples of how Open Banking will impact businesses.
3 Simple Open Banking Use Cases
Making Accounting Straightforward – one way that Open Banking makes life easier for businesses is by allowing online accounting software to connect to bank accounts. This increases the software’s capabilities and makes the accounting function more efficient. Since the accounting software now has access to bank account data, it can automatically record bank transactions without manual data input, it can provide real-time financial insights, and it can automate the tiresome bank reconciliation process.
Easier Payments – with third party companies now able to make bank transfers, innovations that lead to faster payments, added transparency, and lower transaction fees are inevitable. Nowadays, a large percentage of B2B payments are still made by cheques and credit cards, but with the rise of online payment platforms like IBAN4U this may very well change, especially as the online payment market consolidates.
Efficient Bank Loans – when a company needs to get a loan or draw on a line of credit, lenders may want to review the company’s books. Instead of submitting reports (which could be inaccurate by the time lenders see them), lenders can pull the data that they need from your bank, credit card issuer, and accounting system. Thus, the whole process of getting a bank loan becomes significantly simpler.
In the end, Open Banking is not just a trend that is creating opportunities for banks and fintech startups, it is creating opportunities for their clients who will benefit from a lot of continuous innovations in the coming years.