What is open banking?
U.S. President Joe Biden plans to sign an executive order on Friday that asks the Consumer Financial Protection Bureau (CFPB) to issue rules giving consumers full control of their financial data to make it easier for them to switch lenders .
The measure was seen as a big win for financial technology startups in the United States and other proponents of “open banking.”
W hat does open banking mean and what is its significance?
Open banking describes the process of banks and other traditional financial institutions giving customers and third parties easy digital access to their financial data. This includes being able to download and share information about account balances, payments, transactions and investments.
The term can also refer to allowing a third party to initiate transactions from a customer’s account, such as sending a payment or withdrawing money.
Why would I want to share my financial data with a third party?
Consumers may want to share their banking data with other providers to get better and cheaper services than what they already have.
For example, an online wealth management startup might be able to offer better financial advice with a full picture of a consumer’s assets and liabilities. To do so smoothly, it would need access to all the information in digital form, and in real time.
Easy access to data also, in theory, makes it easier for customers to leave one provider for another. Quickly moving information like direct debit instructions or frequent payees removes some of the burdens that prevent people from switching banks.
Why does open banking matter?
Proponents say customers should have access to their data so that they can get cheaper and better services. Open banking would also foster greater competition, they say, and customers, not banks, should get to decide who sees their information.
Critics, including many in the banking world, argue that the industry is already competitive and that privacy and cybersecurity concerns should supercede other considerations. Because it is expensive to maintain and protect customer data, banks have also resisted giving away the information for free.
Have regulators stepped in before?
Yes. European and UK regulators have mandated that, with customers’ permission, banks must allow outside companies to access transaction history and take payments directly from an account.