What Is Open Banking? (2024)

Open banking is fairly well-established in the E.U. and parts of the Asia-Pacific region but has been slower to catch on in the United States. Open banking has the potential to disrupt how banks, businesses and consumers share and use financial data. So what’s open banking, and why should you care?

What Is Open Banking?

Open banking is the practice of securely sharing financial data between banks and third-party service providers, such as fintech apps. Before open banking became available, consumer financial data was controlled by big banks. Now, consumers can manage their financial information and access it across different platforms—receiving a smoother, more personalized experience in the process.

And by leveling the playing field for startups and tech platforms, open banking can stimulate innovation. It pushes large banks to improve their offerings to compete for business with smaller and newer banks. This can benefit consumers, who often end up paying lower costs while enjoying improved technology and customer service.

Before you try open banking, you should know what kind of information you’ll be sharing:

• Account type
• Name on the account
• Date of account opening
• Transactions, including how much you spent and where
• Account balance
• Payment details

How Does Open Banking Work?

Open banking uses application programming interfaces, or APIs, which are software intermediaries that let two programs communicate with each other. While there are risks of using open banking platforms, APIs provide a measure of safety when sharing your financial information.

Once a third-party provider receives the data from your bank, it can use the information to offer you personalized solutions. For example, apps like Mint and You Need a Budget (YNAB) aggregate your data using open banking APIs, which you consent to when accepting the terms and conditions.

Here’s how open banking impacts the different players in the financial services ecosystem.

• Financial services providers: Open banking encourages innovation among banks and third-party service providers, leading to more choices for consumers.
• Businesses: Open banking data helps businesses understand their customers’ needs, allowing them to tailor their product and service offerings.
• Consumers: Open banking gives consumers more control over their financial data and provides access to more efficient and personalized digital money management tools.

How To Apply for Open Banking

Open banking in the U.S. is still in its early stages, but consumers may already be using open banking services without realizing it. Popular financial apps, including Robinhood and Chime®, use open banking software.

And, some of the best budgeting apps, such as Mint and Personal Capital, utilize open banking data to help consumers organize and manage their money in one place. Mint aggregates your banking data to track your spending and give personalized budgeting suggestions. Without open banking, platforms like these wouldn’t exist or would be offered only by traditional banks.

Due to a lack of regulatory framework and government initiatives to support open banking, U.S. companies that want to implement this technology are largely on their own. Financial institutions interested in open banking can develop their own APIs. Alternatively, they may be able to look to the companies providing the banking software they already use. Many of the top banking software providers offer open banking solutions like API portals.

Open Banking Pros and Cons

Open banking has plenty of benefits, but there are some potential pitfalls as well.

Pros

• Innovation. Fintech startups and other developers gain access to consumer data through open banking, which stimulates innovation in the financial services industry. This translates to more financial management tools for consumers.
• Simplified lending process. Easier data movement between banks and fintech companies will pave the way for faster lending decisions. For example, a provider can request your transaction and payment history through open banking APIs.
• Personalization. Consumers are more interested than ever in personalized digital tools that help them track spending, stick to a budget and achieve their financial goals. With open banking, third-party apps can use your financial data to offer suggestions tailored to your situation.

Cons

• Lack of regulation. The U.S. has been slow to adopt open banking standards, but the Consumer Financial Protection Bureau (CFPB) will soon establish rules for consumer data sharing.
• Security concerns. Sharing your financial data online isn’t without risk. However, open banking security is taken seriously, and there are safeguards in place that we cover in the next section.

How Safe Is Open Banking?

You may be understandably concerned about the security risks of sharing financial information across platforms. But one main security feature of open banking is that you won’t share your banking credentials with third-party service providers. Instead, you’ll authenticate directly with your bank. Additionally, financial institutions can’t share your information without your consent, which you can withdraw at any time.

Bottom Line

Ultimately, open banking allows banks and third-party service providers to offer a more personalized and streamlined experience to their customers. When it’s widely enacted in the U.S., it will empower consumers to take control of their money and help them make more informed financial decisions.