Picture applying for a loan just a few years ago. You would have to go to your bank to gather your information, including transaction history, balance, account information and more. Then you would have to connect with a lender and bring the physical documents. But of course, that’s not where the process ends; you would then have to fill out a lengthy application and wait days (if not longer) for the lender to look over your application and your financial history.
Once it’s all done, if you’re accepted, the offer you get wouldn’t necessarily take into account all of your specific needs. It wouldn’t be personalized to you.
Now picture the loan application of today, under open banking: you connect with a lender, enter your bank information and agree to share your data, and they do the rest. In a short matter of time you not only find out whether you qualify for a loan, but what kind of personalized offer you could get.
In a nutshell, that’s what’s so great about open banking. The practice, which has been gaining steam around Europe in recent years (and interest around the world -- check out our list of which countries have open banking) allows a company like a lender to connect with a user’s bank to view the user’s financial data (with the user’s consent, of course). They can then use that information to determine creditworthiness and decide on a personalized offer.
Even with that understanding, you may still be wondering why open banking is important. Well, we’ve broken it down into 5 simple reasons:
One of the biggest draws is, as we described above, the ease that open banking brings to financial errands (read more about how open banking makes our lives easier here). You no longer have to collect your documents and fill out a lengthy application with the lender. Instead, once you agree to share your banking information with the lender, those steps are taken care of for you. The lender looks at your account history and decides – much more quickly than before – what kind of loan you qualify for.
That’s not all. Open banking can make paying for items easier, too. Rather than pulling out a card or cash, you can simply pay directly from your bank account to the merchant.
Essentially, open banking simplifies so many aspects of our financial life, behavior and activities.
Companies like lenders tend to love open banking, too. Not just because it simplifies the process of determining loans and onboarding clients, but because the amount of information it allows them to look over is much more substantial than before. When a client agrees to share their bank information, the lender gets a complete (or nearly complete) picture of their financial health. That includes not only transaction history, but average account balance, spending habits and more.
They can make a more informed decision about a client than ever before.
Above, we said that companies get more complete financial information thanks to open banking. But that’s not just good for companies – it’s good for their clients, too. When a lender has a complete picture of a client’s financial health and history, they can make offers that are more personalized to each client. They have a fuller picture of the client’s spending habits and behaviors, including how and where they spend their money, how often they make big purchases and more. This means the lender can tailor their offer to the client based on their specific financial habits.
Those who are new to the world of open banking have been concerned about its safety and security. But in fact, security of private banking data is one of the major benefits of open banking. In many ways, it’s much more secure than previous or alternative methods of financial data sharing. First, the banks and companies that use open banking in Europe must comply with a strict set of safety regulations set by the European Banking Authority. Other regions that use open banking have similar strict safety regulations.
Apart from that, the actual act of sharing information under open banking is safer than, for instance, paper documents. That’s because paper documents can be more easily manipulated, meaning someone could pose as a person they’re not when applying for a loan. With open banking, the information is transferred from bank to company, leaving no room for tampering or manipulation.
The final, and arguably most exciting, reason open banking is important is because it paves the way for open finance. Open finance is a general term used to describe the next phase of digital, online banking. Currently, open banking refers to payment accounts (transferring money between accounts, sharing data from payment accounts etc.). Open Finance would take the same principles and apply them to all kinds of financial accounts like savings, investments and pensions. That way, users would have complete control over – and understanding of – their entire financial situation, all in one place.
It would be great, wouldn’t it? And we can’t get there without first embracing open banking.
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