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What is Open Banking?

Open banking is the process of electronically sharing financial information — such as transactions — with another financial organization in accordance with the account holder’s permission, and through the usage of APIs.

October 12, 2021

You may have never heard of it before, but open banking is changing the use of technology in finance (fintech) behind the scenes in significant ways. It’s expected that open banking will be a $43.15 billion business globally by 2026. 

If you don’t work in the financial industry, though, you may not know or use this term. In fact, you may be open banking without even realizing it.

So, what is open banking, exactly, and how is it shaking up the way people bank?

A simple open banking definition would be when financial information, such as transactions, is electronically shared securely with another organization with the account holder’s permission.

This sharing happens when a third-party provider (TPPs), such as a financial app, can directly access data from a financial institution through something that’s called an application programming interface (APIs). This can make banking much more efficient for consumers. 

An example of open banking could be an app that allows self-employed people to track their income, manage and claim expenses and calculate taxes owed. 

From a practical sense, open banking allows the following:

  • Suppose you’ve got bank accounts at a couple of different institutions. In that case, you’d be able to see the real-time information from both of them simultaneously, which can make budgeting, spending, saving, and investing much easier. No more flipping back and forth between apps.

  • When borrowing money, you could share financial information with the lender more easily, accurately, and securely. Open banking gives them a one-time ability to review your financial banking history. Although there are ways to do that now without open banking uses, this will streamline the process and make it more precise. 

  • When making a purchase, you would be able to pay directly from your bank account faster and easier. Because your bank could now authenticate and approve the purchase without needing to use any other organizations, the process will also be more cost-effective because there’s no middleman.

Now, here’s what’s confusing. There are apps that perform these functions without the use of open banking. But, these apps use a process called “screen-scraping” that’s less effective than what can be accomplished with open banking.

Open banking uses took a significant leap forward about three years ago, mostly in countries across the pond.

Groundbreaking 2018 Legislation: PSD2

European Union member countries were given until January 13, 2018 to implement what’s called the revised Payment Services Directive (PSD2). 

Before this legislation was put into practice, an app that you’d authorized probably wouldn’t have been able to use open banking to perform its functions. This means that they’d need to get your username and password and then log in to your account to “screen-scrape” your info by downloading content from the banking site using data extraction software. That information wouldn’t necessarily be as reliable as it could be and it could pose security issues. 

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With open banking, though, the app company can directly obtain information authorized by you by integrating with your bank, making the data significantly more reliable with greater security protections.

Taking a look at the United Kingdom as an example, PSD2 required the country’s largest nine banks to securely release their data in a standardized way so that authorized users could access the data easily online. Because these actions were required in European Union member countries, it’s not surprising that, in 2018, two thirds of open banking was taking place in Europe.

As many as 87% of all countries are now using this technology in some form or another. Over the next five years, it’s expected that North American organizations will experience the highest growth in open banking as it adopts advanced technologies.

There’s a key difference in the United States, though: open banking is not regulated like it is in Europe. This means that individual financial institutions must figure out how to leverage this technology. But, it can also open up unique opportunities for enterprising organizations. 

Open Banking Benefits

Plenty of new opportunities for innovation can exist with this technology, which will mean beneficial new consumer services provided by innovative organizations. 

For example, tasks that were once challenging — such as switching your checking account from one bank to another — can be simplified. Apps can:

  • Access and analyze a person’s financial history to recommend the best banking products for them 

  • Provide personalized guidance about how much debt they can take on or how they could optimally invest 

  • Help them to select the best loan program or investment strategy for their unique financial situation

Open banking could even the playing field between small and large banks. Small institutions may have the ability to compete more effectively, which could lead to lowered fees, better customer service, improved technology, and enhanced financial management services for the consumer.

This technology can go beyond financial applications, as well. For example, The World Economic Forum is developing a Known Traveler Digital Identity Program (KTDI). This will allow people to use their smartphones as passports. This is a logical use of the open banking system as documentation required for bank accounts and passports are similar.

Open banking uses can also include a streamlined approach when you’re looking for housing. Apartment or home options could be recommended to people based on their transactional data and help them to understand how much they can afford to pay each month. This use could ultimately spread far beyond the housing industry.

Open Banking and Security

The most common concern about this technology is open banking security. The reality is, this is not a new challenge or one specific to open banking. It’s been a reality ever since online banking started.

Banks can use numerous data security technologies to protect consumer data, such as multi-authentication processes to provide open banking security. As with any kind of online transaction, it will be important for financial institutions to keep up with new risks as hackers try to access data. Artificial intelligence and machine learning technologies will also play a role in the ever-evolving data protection processes. Consumers, meanwhile, should only allow trustworthy apps to access their information. 

If you’re looking for ways to manage your finances while juggling credit card debt, consider Tally.† Tally is a credit card debt repayment app that can help you get out of debt quickly and efficiently. 


​​†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.