Open banking is often helping more people get access to digital financial instruments by giving small loans and credit to individuals and companies who weren’t previously able to.

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Look no further: those with minimal or no credit records, such as recent immigrants or debt-free retirees, are more likely to have their applications for fresh loans denied. This is so because credit reports with current information are typically required by lenders. Open banking may help with that by providing a variety of means for borrowers to demonstrate their creditworthiness, such as by granting access to payroll information, a history of on-time rent payments, or an analysis of their entire cash flow.

How does global open banking operate?

Open banking has been around for a while, in one way or another. However, because the services it makes possible—from payment services to account aggregation—are being adopted by both businesses and consumers, it is just now generating news.

Open banking is driven by industry in several regions of the world, including the United States. While banks have taken the effort to establish services to allow their consumers to share their data, fintechs have been more creative in their pursuit of accessing people’s data in order to provide them more personalized and enhanced financial services.

In other places, open banking is frequently governed by regulations, mostly to promote competition and innovation. Europe is the region where this is most well-known. In order to comply with the EU’s revision of the Payment Services Directive (PSD2), all banks must let their clients to securely exchange account information with other financial service providers as of 2019. 559 third-party providers have registered with national authorities in Europe to offer account information or payment initiation services, according to Mastercard’s Open Banking Tracker for Q3 2022.

Further regulation is in place in Australia, where plans call for future inclusion of utility, telecom, and travel data linkages in addition to savings, investment, and pension accounts. This implies that a provider of financial services may give a customer with a greater array of financial solutions and a more comprehensive perspective of their finances.

Open banking principles are driving fintech innovation in Switzerland, and the Bank of Mauritius has released guidelines for companies offering open banking payment and information services. In the meantime, Nigeria’s central bank established a legislative framework to control its earlier industry-led initiative.

How safe is open banking?

Indeed. You decide who may access your financial information, what parts of it you choose to disclose, and, of course, who can see it. You can withdraw your consent at any moment if you decide later that you would no longer like a provider to have access to your data.

Reputable financial data aggregation systems enable safe access to your data through APIs and conventional connections enhanced with bank-grade security. Application programming interfaces, or APIs for short, allow one company’s software to “plug in to” and obtain data from another company’s software instantly.

The industry is evolving toward more “tokenized” access, commonly referred to as “Open Authorization” or “oAuth” connections, to further strengthen your security. With oAuth connections, you give a third party a “token,” which is a coded substitute for your bank account credentials that, in the event of a breach, has no real value.

Numerous protocols are in place in regulated marketplaces to safeguard you and your data from potential loss and fraud.

For instance, in order to offer services under open banking, third-party suppliers must register with a national regulatory body in Europe. Your bank account information can only be accessed by registered providers with your express authorization, which you can revoke at any time. In order to safeguard your data, providers must also demonstrate that they adhere to basic service level agreements, security protocols, and fraud prevention guidelines.

The creation, sharing, and access to peoples’ data is being defined in part by the adoption of common standards. National organizations and regulators, like the Financial Data Exchange (FDX) in the United States, are responsible for issuing these standards. This group of banks, fintechs, and financial services companies have united behind a single data-sharing standard that has the potential to hasten the adoption of open-banking API frameworks, possibly even on a global scale.

In the meantime, Mastercard is working with important industry players to define and develop the policies and procedures to settle questions and disputes in open banking across the global ecosystem. Mastercard acquired Finicity and Aiia to expand its work in the U.S. and Europe, respectively, and facilitates this quick, easy, and secure data exchange through its Open Banking Solutions.