Open banking is a new concept that is gaining traction around the world. It is a framework that enables banks to securely share financial information with third-party providers. Open banking has the potential to provide numerous benefits to consumers, particularly the underserved population, which has historically had difficulty accessing traditional banking services.
In this article, we'll look at what open banking is, how it can help the underserved, and what obstacles still exist.
What Is Open Banking?
Through application programming interfaces, open banking allows banks to share financial information with third-party providers (APIs). These APIs allow third-party providers to securely access financial data from banks.
This data can be used by third-party providers to develop new financial products and services or to improve existing ones.
Around the world, open banking is becoming more common, with many countries enacting regulations requiring banks to share financial data with third-party providers.
For example, the European Union implemented the Payment Services Directive 2 (PSD2), which requires banks to share financial data with third-party providers who are authorized by the appropriate regulatory body.
How Can Open Banking Benefit the Poor?
When it comes to traditional banking services, the underserved population faces numerous challenges. They may, for example, have limited access to bank branches or ATMs and may not meet the stringent requirements for opening a bank account. In several ways, open banking can help to address these issues.
Moreover, it can improve access to credit for the underserved. Third-party providers can use financial data to assess creditworthiness and create loans for those who may not meet the stringent requirements for traditional bank loans.
A third-party provider, for example, could assess a customer's ability to repay a loan using data from their savings account. This would allow the provider to make loans to customers who might not otherwise qualify for a traditional bank loan.
Second, open banking can help the underserved obtain more affordable financial products. Third-party providers can use financial data to create tailored financial products for underserved populations. For example, a provider could create a budgeting tool based on data from a customer's transaction history to help them manage their finances more effectively.
Finally, open banking can help the underserved gain access to financial services as it can help underserved populations build credit histories and improve their financial literacy by providing access to financial services and products.
This, in turn, can lead to greater financial stability and more opportunities for wealth accumulation.
What Obstacles Remain?
While open banking has the potential to provide many benefits to the underserved, several obstacles must be overcome in order for it to be successful.
To begin, there is a significant challenge in terms of data privacy and security. Sharing sensitive financial information with third-party providers makes open banking vulnerable to hacking and other security breaches.
To protect customer data, strong data protection standards and regulatory frameworks must be established.
Second, there is a need for increased open banking awareness and education. Many consumers, particularly underserved consumers, may be unaware of the benefits of open banking or how it works. Education and awareness campaigns could help to increase understanding of open banking and encourage greater adoption.
Third, greater collaboration between banks and third-party providers is required. Banks must share financial data with third-party providers under open banking, which may be viewed as a threat to their traditional business models. Building trust between banks and third-party providers is critical, as is creating a collaborative environment that benefits all parties.
4 Steps on How to Build an Effective Open Banking Framework
By providing greater transparency and competition in the banking industry, open banking is expected to benefit underserved and unbanked populations. However, there are concerns that without proper regulation, open banking could backfire on the very people it is supposed to help.
One of the main risks of open banking is that it could exacerbate existing inequalities in the financial system. While the increased competition and innovation brought about by open banking may benefit some customers, it may create new barriers for others. For example, low-income individuals and those with poor credit histories may be excluded from accessing certain financial services, as third-party providers may be more likely to target higher-income customers with more profitable products.
Additionally, there are concerns around data privacy and security. With the potential for large amounts of sensitive customer data to be shared between multiple parties, there is a risk that this data could be mishandled, leading to breaches and fraud. This is particularly concerning for underserved populations, who may be more vulnerable to financial fraud and abuse.
In order to mitigate these risks and ensure that open banking is truly inclusive and beneficial for all, a solid regulatory framework is necessary. We’ve highlighted some of the key steps that should be taken to build such a framework:
- Establish clear data privacy and security standards: To ensure that customer data is protected, clear and enforceable, standards for data privacy and security must be established. This includes ensuring that customers have control over their own data, that data is only shared with third-party providers with explicit customer consent, and that data is stored and transmitted securely.
- Require transparency and fairness in pricing: To prevent the exclusion of underserved populations, regulators should require third-party providers to be transparent about their pricing and ensure that pricing is fair and non-discriminatory.
- Provide education and support for underserved populations: To ensure that underserved populations are able to benefit from open banking, education and support should be provided to help them understand how it works and how to use it. This could include financial literacy programs and support for navigating the complexities of the financial system.
- Monitor and enforce compliance: To ensure that the regulatory framework is effective, regulators must be able to monitor compliance with established standards and enforce penalties for non-compliance. This includes imposing fines and revoking licenses for providers that fail to meet regulatory standards.
Conclusion
Open banking has the potential to provide numerous benefits to the underserved population.
To ensure its success, several challenges must be addressed, including data privacy and security, awareness and education, and increased collaboration between banks and third-party providers.
By doing so, open banking will certainly be set on the path to transform the banking industry, improve the financial well-being of underserved populations and contribute to a more equitable society by facilitating credit access, providing more affordable financial products, and increasing financial inclusion.
