Last editedFeb 20232 min read
If you work in financial services, you’re probably already familiar with the concept of open banking. Yet although it’s become commonplace in Europe and worldwide, this buzzword still mystifies many within the United States. Here’s a breakdown of the open banking definition, and what it means for US businesses.
What is open banking?
The open banking definition describes the concept of open data between financial institutions. The process involves allowing user data to flow from banks or other financial institutions to third party providers using APIs. However, this flow of data is entirely controlled by the user for secure access to financial products they may not be otherwise able to benefit from.
Open banking also involves putting the infrastructure in place to facilitate data sharing. The aim is to encourage new companies to provide innovative products and services based on customer needs.
Financial service providers benefit from the ability to innovate
Businesses benefit from wider automation and the ability to offer more efficient payments
Customers benefit from more efficient, innovative ways to make payments and invest
Open banking around the world
Open banking’s foundation was laid back in 2013 with the European Commission’s PSD2 framework allowing third parties to access data. Some form of this concept exists in multiple countries and multi-country regions. By 2019 alone, over 87% of countries offered some form of open banking API. This includes national frameworks throughout Europe, Asia, and Latin America.
Open banking in the US
While Europe has a clearly defined framework with its PSD2 initiative, open banking in the US isn’t so structured. There’s no similar regulation to lay the groundwork for open banking, which means that private companies are left to fill the gaps.
In contrast to Europe, the US is private industry-led with its approach. It faces unique difficulties because the country’s financial institutions are overseen by numerous regulators, not only at the federal but also at the individual state level. To get the ball rolling with nationwide open banking, the US Congress would need to pass legislation. This would need to be enacted into law and then finally passed on to regulators to agree upon a standard. Another issue to overcome is the lack of a national data privacy framework. These also vary from state to state, which is something that would need to be standardized.
What this means for open banking in the US is that for now, private companies are leading the charge. Financial institutions can turn to their core providers to get started with API development, including JHA, Fiserv, and FIS. All three of these providers have open banking strategies and new API gateways for banking clients to work together with private third parties. Banks also have the option of developing their own API layers to sit on top of core products.
The future of open banking in the US
Despite the lack of a national open banking framework, there’s still plenty of potential for this technology. There are already plenty of API gateways to choose from for banks and businesses that want to partner with third-party fintech companies.
Another factor to consider is that while open banking lags in comparison to other countries, there are enough multinational corporations in the US that are seeing the benefits from their operations overseas. This is sure to increase demand.
So, what are these benefits? Open banking offers better customization for financial products, while reducing costs and offering faster, more convenient payment methods. Consumers gain greater control over their money with wider personalization, while businesses benefit from more effective targeting. From aggregating financial accounts to automating everyday services, the sky’s the limit.
One way to get started with using open banking in the US is by signing up for GoCardless Instant Bank Pay. Powered by open banking, it lets your US-based business take instant one-off payments from UK-based customers. Bank-to-bank payments are confirmed immediately for a smoother, more user-friendly transaction.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.