Do you use a budgeting app that categorizes transactions for you? Have you ever applied for a loan online or used an app to make a payment? If so, you — along with 91% of Americans — have experienced open banking.
Open banking allows banks to securely share your financial data with third parties. Doing so can allow different financial institutions, platforms, and technologies to “talk” to one another, expediting a range of tasks. For example, open banking allows a lender to immediately access your financial information when approving your loan application without the need for you to provide individual records and bank statements.
While open banking is a relatively new technology, it’s already changing the financial landscape. Learn more about open banking and how it works.
Open banking uses application programming interfaces (APIs) to share your financial data with third-party institutions, apps, merchants, and more. APIs allow the secure transfer of information across institutions, facilitating a variety of financial activities and services.
In the past, only you and your bank had access to your financial data. That means if you wanted to budget, for instance, you’d need to manually check your bank account for a record of your transactions. You’d then need to add them to your budget spreadsheet, reconciling each category at the end of the month.
Open banking, on the other hand, allows for the secure transfer of data from your bank to a budgeting app, which may automatically record, categorize, and reconcile your transactions in real time. Rather than having to provide the information to the budgeting app, the app and your bank communicate directly.
Generally, you have to consent to third parties accessing your data for use in open banking.
With the majority of Americans using some form of open banking, there are several common examples of everyday use of this technology:
Budgeting: Many of today’s popular budgeting and money management apps use open banking technology to provide automatic reports of your spending. These apps may even categorize transactions and give you a real-time look at your net worth.
Bookkeeping: Like budgeting apps, bookkeeping software can help businesses track payments, invoices, and revenue. By connecting your bookkeeping software with your business bank account, open banking lets you skip any manual data entry involved in these tasks.
Payment apps: As checks fall out of fashion, payment apps such as Venmo, PayPal, and Zelle are in. Peer-to-peer payment apps may use open banking to let you make payments directly from your bank account without needing to provide your bank information.
Loan applications: When you apply for a loan, the lender takes a detailed look at your finances and credit history. Open banking speeds up the lending and loan underwriting process by eliminating the need to manually gather this data from a variety of accounts.
Marketing: With the ability to quickly and accurately compile a customer’s data, open banking can be a valuable marketing tool. For example, it can help companies create personalized offers for financial products and services based on consumers’ activities, preferences, and financial circumstances.
Like many innovations in finance, open banking offers a range of potential benefits. Some of these include:
Personalization: Tailored financial products and services benefit both businesses and customers. With easier access to consumer data, businesses can better serve customers and be more competitive.
Convenience: Open banking adds convenience to a range of financial activities, from budgeting to applying for credit. This technology makes manual data entry unnecessary.
Efficiency: Open banking can speed up a range of processes, including applying for a loan, reconciling a budget, paying bills, and more.
Money management: By allowing your various financial accounts, banks, and firms to talk to one another, open banking makes overall money management much easier. For instance, certain apps may pull data from each of your accounts, showing you a detailed look at your cash flow and spending or giving you a snapshot of your current net worth.
Innovation: With more data to work with, businesses can innovate new products and services to better serve their customers.
Open banking also presents risks for any consumers, banks, and merchants that use it. Consider the following potential challenges of open banking:
Security and privacy: Some consumers may be wary of opting into open banking because it means sharing data with third parties. The more players who have access to your sensitive data, the greater the opportunity for it to land in the wrong hands.
Industry changes: As open banking becomes more widespread, fintech companies and other new stakeholders will adapt and innovate to cater to customers. This can present a challenge to traditional banks, which will have to invest more in new technologies to stay competitive.
New technology: Open banking is still a relatively new technology and will continue to evolve in the future. For example, as recently as 2024, the Consumer Financial Protection Bureau (CFPB) finalized a rule to protect consumers’ personal financial data. Both businesses and customers will need to adapt to and stay aware of a rapidly changing industry.
Technology changes quickly, making it tough to predict exactly how the banking industry will evolve in the future. But open banking will undoubtedly influence finance — likely in the following ways:
New products and services: With more integration between technology and finance, there may be new financial products and services coming to the market.
More competition: As companies use open banking to better serve their customers, competition between businesses will grow. And with the CFPB’s recent rule requiring financial institutions to share customers’ data at their request, consumers will more easily be able to move their business based on where they can find the best accounts.
Better customer experience: Ideally, open banking will create a better customer experience within the financial industry. As companies more easily access customer data, they can better serve individuals with more personalized offers.
