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Banking Basics

Open Banking: Everything You Need to Know

Open banking calls for financial institutions to use APIs to make certain customer data available to non-bank third parties. This can be advantageous to you as a consumer.

Katana Dumont • January 14, 2022

In This Article

  1. What Is Open Banking?
  2. Examples of Open Banking
  3. Potential Benefits of Open Banking
  4. FAQs
  5. Final Thoughts

Are you familiar with the practice of open banking? 

If you answered “no,” you’re not alone. Open banking is still an obscure concept in the U.S., and according to research from GoCardless, half of Americans (52%) say they have “no clue” what open banking is. 

This lack of knowledge around open banking is understandable considering open banking is just starting to ramp up in the U.S. — lagging behind other nations, like Europe and Asia. But it’s worth taking the time to familiarize yourself with the concept, as open banking is a driving force of innovation in the financial industry. 

Read on to learn the basics of open banking and how it’s significantly improving the financial services available to consumers.

What Is Open Banking?

Open banking refers to the practice of sharing consumer financial data with third parties via application programming interfaces (APIs). Consumers’ financial information is shared securely and electronically, with customers’ permission, from a bank or financial institution. Customers are normally required to grant consent to allow for the access and sharing of their data, such as by checking a box on a terms of service agreement in an online application. 

This networking of accounts and data across financial institutions for use by consumers and third-party service providers can allow customers’ information surrounding account balances, payments, transactions, and investments to be downloaded and shared. The term can also refer to allowing a third party to initiate transactions on a customer’s behalf, such as sending or withdrawing money from their account.

Open Banking API

APIs allow different software interfaces to talk to one another. The purpose of APIs is to leverage data and simplify software development.

Examples of Open Banking

There are many uses for open banking. For example, open banking can better facilitate the process of switching from a checking account with one financial provider to another, or help a consumer more easily share their financial information with a mortgage lender.

Consider some of these common uses of open banking:


Open banking can help lenders get a more accurate picture of a consumer’s financial situation and risk level in order to offer more profitable loan terms. Furthermore, open banking helps increase the speed of loan application screening and approval.

Personal Finance Tools 

Through the use of data sharing, personal finance tools are able to give customers a complete overview of their financial situation. For instance, personal finance apps that analyze spending habits and offer customer-specific product recommendations, all help to identify the best financial products and services for a user.

Digital Payments

Sending and receiving money online or with an app is made more seamless with open banking because it allows for a frictionless customer experience when authorizing payments. In order to increase security in electronic payments, open banking verifies users’ identities and bank account numbers before authorizing a payment or withdrawal of funds.   

Bank Accounts

Open banking makes the onboarding process for opening a new checking or savings account faster and easier. Open banking allows the flow of bank data so that a consumer’s information, such as address, occupation, income details, name, and date of birth, as well as credit history, are all available in one place. This ultimately makes the experience of opening a new account smoother for customers.

Potential Benefits of Open Banking

Open banking ideally aims to provide a better financial experience for consumers by allowing for the delivery of superior products and cheaper services. Fintech companies, businesses, and financial institutions can benefit from the sharing of user data as well.

Here are some of the benefits offered by open banking:

  • Open banking breaks up the monopolies of financial services and allows more players to enter the market. This gives customers greater access to a range of financial services from a larger number of providers.
  • Open banking makes it easier for consumers to view and manage their finances. Having financial data all in one place gives consumers a more accurate picture of their financial situations.
  • Open bank data can speed up the loan process by automatically and safely transferring data into application forms and making it easier to assess credit risk.
  • Open banking APIs promote the development of new apps and services by third parties who want to build and distribute their own financial products.
  • Open banking can help fraud detection companies better monitor customer accounts and identify problems sooner.
  • Open banking makes it easier for customers to switch financial providers by seamlessly moving financial information from one financial institution to another. 


Is open banking safe?

The sharing of financial data online will inevitably come with some risks, such as data breaches, but in most cases open banking is safe, and security is taken very seriously. Open banking APIs are generally considered a secure way to share information because they enable applications to share data directly without sharing account credentials. It’s also important to note that open banking is solely permission-based, meaning user data cannot be shared without customer consent.

How do I set up open banking?

If you would like to grant permission for your bank to share your financial information with third parties, you will most likely need to have some sort of online banking account first. The process will differ depending on your bank and their policies, but in general you will need to find where the open banking permissions live on your online portal and agree to authorize third-party access to your data. Not all banks or financial institutions practice open banking, so find out if yours does and what their process is for setting it up.

What is PSD2 and how does it relate to open banking?

The Payment Services Directive 2 (PSD2) is an open banking initiative launched in Europe that requires large banks to share financial information with third parties. The goal behind the regulation is to give non-banking firms the chance to compete with banks in the payments business and give consumers more choice over financial products and services.

What initiatives has the U.S. taken to support open banking?

In July 2021, President Biden signed the Executive Order on Promoting Competition in the American Economy. The order encourages the Consumer Financial Protection Bureau (CFPB) to consider crafting regulations in support of open banking with the goal of making it easier for consumers to safely switch financial institutions and use new and innovative financial products while maintaining privacy and security. 

Final Thoughts

An open banking model can facilitate multiple valuable services to both consumers and providers. Giving customers access to their data might secure them cheaper and better products by fostering greater competition in the marketplace. Open banking can also give financial providers greater insight into what services their customers need and how to better meet those needs. The possibilities and uses of open banking are ever-evolving and changing the way we bank.

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