What is open banking?

Open Banking: definition 

Open Banking is a term that refers to the sharing of data collected by banking institutions on their users.Open Banking originates from the change in consumer behavior with the massive digitalization of all industries.

Open Banking corresponds to a desire to respond to consumer demands for innovative services and to encourage innovation by opening up banking resources to Fintechs and other financial providers.

Finally,Open Banking tends to bring more protection and security to users while giving them the means to better control their data.

This trend was born in Europe following the adoption of the European Payment Services Directive (PSD2) in 2015. Open Banking has since been exported to the United States and the United Kingdom and appears to be becoming the new norm in the financial sector.

In practical terms,Open Banking refers to an "open" banking system, in which users, whether individuals or companies, can authorize authorized financial actors (banks or other financial service providers) to have access to data on their assets and financial transactions.

How does Open Banking work? 

From a technical point of view,Open Banking is based on APIs (Application programming interfaces). These are tools that allow two computer programs to communicate with each other.

APIs allowsecure exchange of banking data: they make visible the types of data that can be shared and require one or more keys to perform authentication.

Finally, these interfaces allow third-party software developers and IT systems to create applications and services around financial institutions.

There is no "official" API for Open Banking, banks and other licensed financial players provide their own APIs to access a particular type of banking data.

Some allow read access to bank accounts (to obtain account balances and transaction information, for example), others write access (to make authorized payments). 

Why is Open Banking revolutionizing the financial system? 

Open Banking is a real revolution in the financial sector. While banking information was until recently jealously guarded by banks,Open Banking and the use of APIs allows, for example, developers to create innovative services for financial institutions.

By forcing financial institutions to share access to information about their users' banking transactions, transfers, but also their money deposits, and provided that the latter agree,Open Banking opens up many opportunities.

This is illustrated above all in the creation of numerous fintechs aimed at bank account aggregation, budget coaching or the creation of solutions that allow the reinvention of many banking or credit experiences. 

What are the advantages of Open Banking? 

Better security of personal data

Sharing and using customer data exposes customers to a number of risks, starting with the risk of having their information hacked in a cyber-attack.

Prior toOpen Banking, various financial providers accessed a user's financial data through "screen scraping".

The user then had to share his login information with the provider. Thanks to the innovation of Open Banking and its secure APIs, the risks are reduced. Indeed, a key must be used to access the information. The customer's identification information is never requested.

Open Banking enables a better customer experience

Open Banking facilitates access to banking data and thus lowers the barriers to entry in the banking sector, resulting in increased competition and attractive prices. Above all, such a revolution allows the creation of new innovative services that are more focused on the customer and its uses.

Access to financial data, for example, is driving theemergence of account aggregators that bring together all your financial data and bank cards, investments, loans, retirement plans, etc., and provide a comprehensive view of your finances.

Open Banking also allows a better study of user behavior and helps financial actors to decide whether or not to grant credit without bias.

Businesses and their customers will also be able to make and receive bank-to-bank payments more quickly and efficiently. Card payments may one day become obsolete in the face of developments enabled by Open Banking.

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What data does Open Banking give access to? 

The data shared in the context of Open Banking is varied. It can be data such as the geographical location of bank branches and ATMs, banking services offered in such and such establishments, as well as customer data (deposits, transfers, and other current operations).

The use of this personal data can only be done with theprior consent of the users.

More specifically, the data to which Open Banking gives access can relate to bank accounts (name of the holder, type of account, currency and transactions) and to products and services offered by a financial institution.

Open Banking also facilitates payment initiation (making payments from one bank account to another): instead of having to log into your online customer area and go through the payment process manually step by step, this process can now be initiated via software, application or website, subject to the account holder's explicit consent.

Use case of Open Banking at Karmen 

Karmen offers an innovative solution for financing SaaS or non-dilutive companies. Karmen's Revenue Based Financing (RBF) is in fact a cash advance, allowing the release of capital for business growth in a non-dilutive manner.

To score a company's performance and its ability to repay financing, Karmen connects to the start-up's software and retrieves a wealth of data. Karmen's secure API enables real-time analysis of a company's financial and operational health.

Particular attention is paid to financial and billing information (Stripe, Checkout, GoCardless, etc.), banking (via Open Banking) and accounting.

The data received through Open Banking is then processed by a proprietary scoring algorithm that evaluates the credit risk and determines in less than 48 hours whether the actor is eligible for financing or not.

Karmen's technology solution is simple, transparent and secure. Its plug-and-play digital platform allows stakeholders to securely share their information and eligibility online.

The other significant advantage of the RBF is that thanks to the automation of the operations and the continuous scoring adjustment, the refinancing of the company will be possible in an automatic way.

Does PSD2 fall under Open Banking? 

Adopted in 2015, the PSD2 (Payment Services Directive) aims to foster competition and innovation in the financial sector. It removes banks' monopoly on the use of customer data, allowing other companies to use that data, with customer permission.

Such a directive, which has been gradually coming into force since 2018, is thus in line with the logic of Open Banking in that it defines a format and a procedure for sharing banking data. Indirectly, such a development also encourages innovation within the European banking ecosystem to allow the development of global leaders.

It also enhances competition between banks by giving consumers more freedom to choose their banks and financial partners. 

Thus, the sharing of banking information, in line with the logic of the open system of Open Banking has been supported by successive regulatory changes.

Initiated in Europe, such a revolution in the banking system is spreading to the rest of the world and opens up countless opportunities to boost the industry by promoting competition and innovation. Open Banking also ensures the security of personal data with the development of secure APIs that do not require the communication of user identifiers.