What is open banking and open banking technology?
Open banking is both a concept and a technology developed by the Bank of England to encash on the dormant banking information of customers. The information-sharing empowered by the Payment Service Directive 2, enables vendors to share customer banking info with other banks, generating income and business to the institutions involved by providing tailored services to customers. To do so, the banks should expose their infrastructure to their authorized third parties’ Application Program Interface (APIs). This act opens the threat surface and increases operational risks of the involved financial organizations, flagging the need for secure integration, design and development practices and post-development security conformance assessments.
Open banking technology also provides customers with a reliable approach to sharing financial information securely through an electronic medium to authorized third-party service providers who offer tailor-made financial services. The APIs allow third-party financial service providers to access customers’ banking business data. and other transactions. The APIs support aids by supporting the development of applications and services for the sharing of information and subsequent tailored service delivery. Open banking technology permits the networking of data and accounts across organizations to benefit financial organizations, customers, and third-party services providers.
Open banking technology uses Personal Financial Management (PFM) tools to track expenditures and financial information, with the help of the customer’s bank account details. Customers, by sharing their account details and transaction history, can translate this information into tailored services such as allowing customers to control their accounts, thus helping help them to yield better rates on credit cards, mortgages, overdrafts and the likes easily.
Open banking technology can re-shape the consumer experience and competitive landscape of banking and other financial organizations. The sharing of customer data with the help of the open banking system opens the door to both promising gains but also severe risks. Open banking systems are primarily employed by online financial service vendors and tech start-ups. End-users are allowed to use open banking technology once they provide consent for the bank to access their accounts before they send their banking data to such vendors.
Open banking technologies rely on networks rather than centralization which makes them the driving force of innovation in banking and financial organizations. The APIs benefit consumers with various financial services such as Open banking API, which promotes the process of switching from one bank’s account to another bank’s account seamlessly. Additionally, APIs help to view the consumer’s transaction history, and identify the best financial service and products, such as new saving accounts or different credit cards that are suitable for the customer.
What is the revised payment service directive?
Revised Payment Service Directive (PSD2) is a payment service that allows organizations and consumers to use third-party consultants to manage their finances. PSD2 changes the path of online payments and information that is displayed during transactions. The PSD2 breaks the cartel control banks and other financial organizations have on their customers. They grant permission to the merchants to access the user's bank account data with the user’s or customer’s consent. This means merchants can retrieve user data from banks. Furthermore, PSD2 allows merchants to make payments for users without redirecting the customers to other transaction services.
PSD2 provides all the accounting data in one place for customers with more than one bank account. The online payments in PSD2 require stronger identity checks than standard financial transactions. The PSD2 supports a legislative authority for the vast amount of open data and increases the open data interchange between banking organizations. The third-party provider is allowed to intermediate and dis-intermediate the relationship between customers and financial organizations in the PSD2.
PSD2 uses the concept of open banking technology that practices open APIs, which allows developers to build applications and services based on the financial service industries. The PSD2 enables the account authorized Account Information Service Providers (AISPs) when they access the partner bank accounts, which allows them to provide them with more functionality and expand their services. AISPs offer services such as investment advice, personal financial management, and more, based on a customer’s income and expenditures or personal financial management. The PSD2 refers to the stronger authentication process, such as dual authentications during the customer identity check.
Benefits of using open banking technology
Useful tools are built: application developers are put at ease, With the help of Open APIs, it is easier for application developers to build customer-centric tools as organizations can provide services crafting and support to end customers, using control visibility of the customer’s expenditure. Public Personal Financial Management (PFM) tools are used by the organizations to predict what the customer’s account will look like in the future, or suggest products to save the end-users money.
Streamlined lending: Open banking technology enables a third-party service provider to furnish a streamlined view of the best deals on loans provided by partner banks. This can be done by analysing transactions, past borrowing, repayment modes and other account information of the customer. Open banking technology provides a better way to arrange a loan when compared to the manual collection of information from various sources, which are then presented to potential lenders. Lenders can quickly grab the document required in open banking technology. Banking staff can have access to the customer's savings and checking accounts and download transactions for making alternative lending decisions.
Automated accounting: storing data in open banking technology is more accessible and less expensive. The integrated systems are updated when customers receive or send payments. Sometimes the open banking system provides a reduction in manual tax-preparation tasks.
Fight scam and waste: the conventional banking systems and third-party applications can scan through transactions, but with Artificial Intelligence and crowd-sourced information, banking systems may bring up information that is not required. Open Banking Technology offers an accessible way to use the data, and thereby provides visibility for more accounts.
Comfortable to build money management tools Assistance: Open banking technologies used in banks and other financial organization compare the customer expenditure of each month with their previous month's expenditure and displays it to end-users. Personal loan and car loan data are provided by the open banking system, along with the daily expenditure details. With all the information, the customers can gain a better understanding of their financial situation.
Supports the customers when required: The open banking system provides the opportunity for banks to connect with their customers. Sharing the data under open banking systems provides banking and financial system services with the ability to understand the customer’s financial situation. Credit card scores are used as a trigger to prompt more detailed information about the end-users income and expenditure. Hence the open banking system provides the opportunity for banks to connect with their customers.
Open banking system: Implementation and risks
The rapid development in financial services has led to constant competition among various financial technologies. Open banking technologies provide an opportunity to eliminate these pressures rather than associating with them. Open banking systems are the technologies adopted to provide bank account ownership to customers directly rather than with the interference of financial institutions. It is a technology that alters the relationships between the organization and customers by switching systems and conventional practices, finally creating new revenue-sharing ecosystems.
Open banking technologies can increase revenue streams in financial systems along with expanding the reach of customers to financial organizations. Open banking systems allow banks to commercialize their infrastructure by shifting into the Backend as a Service Space (BaaS), granting core services to financial technologies and other third-party organizations.
Implementation of open banking systems
Successful implementation of open banking technology is essential for banks and other financial institutes to gain full advantage of the technology. Some of the key considerations on the road to achieving the successful implementation of open banking systems are:
API Specification: banks and financial institutions need to characterize an appropriate API specification, to ensure standards are followed when a bank exposes their internal data and services to external mediums. Various data and internal banking applications like ATM locations, exchange rates, interest rates, and branch locations, are exposed through open APIs. All the sensitive customer account information is exposed by the banks or financial institutions through secured APIs.
API Security: banks and financial institutions need a plan to restrict unauthorized third-party access to secure APIs. When APIs are defined and are available to the outer world, banks generally implement multiple layers of security technologies to protect the exposed APIs. The authorization mechanism such as certifications based on third-party authorization, authentication, and OAuth2 tokens are regularly used in various open banking systems.
Customer authentication: The bank requires the customer’s consent while sharing sensitive customer data with third parties. Authentication is the combination of two or more factors of ownership, knowledge, and inheritance to safeguard sensitive financial information. Some of the authentication factors that are used by banks and other financial institutions include facial recognition data, fingerprints, voice, and SMS OTPs. The methods, such as mixed, delegated, and embedded techniques, are also used by financial institutions and banks to safeguard sensitive data.
Transaction Risk Analysis: It is essential to go through all the authentication procedures and provide consent while generating payments even if the transaction procedures do not have any risk. The Transaction Risk Analysis (TRA) refers to identifying the level of uncertainties during transactions and providing access to the customer to skip the authentication factors if the level of risk is low.
While implementing open banking technologies, banks need to think about the capability of the platform and about the transaction risk analysis solutions that are implemented by banks and other financial institutions.
Customer consent management: This deals with providing the customer with the authority to control personal financial data. Decisions on managing consent are based on criteria such as the level of sharing, time, and purpose of the transaction. Open banking systems should be capable of capturing, storing and validating permission while sharing customer data with a third party.
Third-party onboarding: Consumers generally subscribe to the APIs offered by open banking when needed, with the banks usually providing signup forms for third-party customers.
Banks can handle the signup request of customers generally in two different ways. Some of the banks prefer fully programmed processes, where the data is checked and approved automatically through a fully computerized workflow. In some instances, banks prefer manual procedures where the banking staff need to review and approve the signup forms manually.
Directory services introduced in some of the financial institutions provide the customers with onboarding capabilities. The banks and customers designate with the directory services and provide essential credentials that help to recognize customers. The banks call the directory services when the end-users communicate with the bank with the help of the credentials submitted by them during the registering process.
Risks in open banking technologies
Attacks on APIs: Distributed Denial of Services (DDOS) is caused by attacks on Application Program Interfaces (APIs) which may result in downtime. Cybercriminals study API systems to find their security flaws.
Attacks on applications: These are the prime targets of cybercriminals, since most customers prefer mobile apps while using open banking systems. The passwords, usernames, and encryption keys present in the applications may help the cybercriminal to retrieve sensitive banking data.
Attacks on fin-Tech companies: The security levels and experience of various fin-tech companies differ from each other. Cybercriminals pretend to be legitimate banks or customers to attack fintech servers as they are the ideal targets to steal the customer’s banking data.
Disaggregation and disruption: the propositions of transactions processed by various organizations decrease with the increase in players providing financial services. The overall activities have a limited view, which makes it harder to identify suspicious or irregular behaviors.
Endpoints Security: the endpoints in banking systems are always a security risk. Third-party APIs are protected with the help of valid API formats. Protecting business networks accessed by remote devices such as tablets, laptops, smartphones, or other wireless devices are referred to as endpoint security protection.
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