Charting The Course To An Open Economy (Part 1 Of 3)

President of Technology and Chief Technology Officer at Okta.

The financial services industry continues to evolve, and almost all trajectories point to a paradigm shift that dramatically changes the banking landscape. There’s been a significant digital transformation in banking over the last several years. Part of this digital revolution is based on consumer demands and expectations shifting, including the ability to access information securely and seamlessly via networks and online portals. This is where the concept of open banking comes in, which allows for the networking of accounts and data across multiple financial institutions and third-party service providers.

Open banking is continuing to gain widespread attention across the globe due to the customer-centric model it provides to banks, merchants, third-party providers and, ultimately, the consumer. However, this is just the beginning, as this digital transformation is paving the way for all industries toward an open economy model. This model is poised to take hold and allow organizations and third-party providers to securely share data in a way that they’ve never been able to do before.

What Is Open Banking?

Open banking allows banks to share customer data with third-party providers via application programming interfaces (APIs) through a unified dashboard view of all interconnected banking services. This enables users to make quick, secure payments and access banking services directly between service providers, which then allows for consumers to securely access financial information. This process is done with customer consent and is highly secured with verification and authentication steps that allow consumers to access all information through one application.

As an example of open banking, let’s say I’m a consumer who utilizes a fintech application to connect my financial services accounts like checking, savings, credit cards and credit risk assessments. This allows me to get a holistic view of my financial wellness and to see how much money I have in an account, as well as the budget and transaction trends on where I spend my money. Open banking means I no longer must go to multiple places to see my spending and budgeting trends.

The countries embracing open banking are either adopting a modified version of open banking compliance like the Consumer Data Right (CDR) in Australia or taking best practices from open banking that are more market-driven. As of today, financial services providers leading the charge in the U.S. are those that hope that open banking will differentiate them from the competition and attract a new demographic of consumers. These financial institutions understand that progressiveness, innovation and digitization are leading the way for increased automation, streamlined efficiencies and broadened customer service offerings.

This digital transformation takes time, however, as the financial services industry works to collaborate more with third parties and understand what infrastructure is needed to secure the offerings. However, it will be imperative to implement the necessary infrastructures to make this happen. Because, ultimately, open banking is just the beginning.

How Open Banking Leads To Open Finance

The foundation of open banking—including collaboration and data sharing among organizations providing banking products, services and experiences—is evolving as open finance as the sharing of additional financial accounts and payment information expands. Open finance is different from open banking in that it expands the reach of data sharing in the financial space and adds additional elements of a financial footprint. This includes the ability to have a dashboard with not only banking information but also mortgages, savings, pensions, credit, insurance, utilities and more.

For example, imagine applying for a mortgage. Rather than downloading each paystub, tax document and credit report and reuploading this information into a different application for your mortgage application, open finance would allow you to securely authorize and connect financial information under a unified dashboard. Simply put, open finance includes the ability for consumers to understand the complete picture of their finances and broaden their view of a multitude of financial services relationships.

Widening the scope of open banking to open finance can look daunting at first, but those that can get ahead of the innovation curve stand to benefit. For it to work, financial services providers, fintechs and other partners must look at how to share data in a way that meets consumers’ needs, garners trust and ensures the security of all information, especially the most sensitive. There are many ways to do this and guarantee collaboration among all partners. In part two of this series, I’ll cover some of the ways this can be achieved, along with various steps to take to prepare ecosystems for open banking models.

Paving The Way To An Open Economy

Today, we’re experiencing both a mindset and technology shift in how we think about and allow the sharing of data across industries. Ultimately, what this means is that open banking will lead to open finance, which will lead to an open economy. There will be endless industries that are part of this digital shift as consumers require more streamlined services at their fingertips and better digital experiences from all industries.

Now’s the time to start with a digital infrastructure strategy that can help grow and transform with you so that you’re ready. It’s just a matter of time—and trust.

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