The rise of fintech in the U.S. and abroad has shed light on a new area that could benefit from more collaboration. Open banking could be the collaboration tool that allows fintechs and traditional banking institutions the opportunity to work more efficiently to serve a growing and financially diverse customer base.

Let’s discuss its role, importance, and future.

What Is Open Banking?

According to Investopedia, open banking is a “practice that provides third-party financial service providers open access to consumer banking, transaction, and other financial data from banks and non-bank financial institutions through the use of application programming interfaces (APIs).”

Open banking is quickly becoming one of the most popular and innovative practices that could reshape the banking industry. By adopting open banking, third-party applications would have access and control of customer financial data that has previously never been accessible to them. The goal is to create a more streamlined process when it comes to financial and banking transactions.

The Importance of Open Banking

Open banking has many real-world benefits for individuals and businesses of all sizes. By creating networks that share banking information, communication and transactions between different banks, apps, and other financial institutions become much easier, and safer in many cases.

One major benefit is the idea that it can create a clearer picture of a consumer’s financial situation.

For example, if a person in their 20s were looking to purchase a house, they need multiple lines of credit in order to secure a loan for that house. However, if that person didn’t have student loans and used credit cards sparingly, it would be difficult for them to procure that loan under current regulations and practices. But with the new system, lenders would be able to see that this person is more than capable of making reliable payments outside of the traditional credit check items. Many people are relying more and more heavily on online banking and automatic payments, and this coupled with data from credit cards and other transactions could help lenders assess a consumer’s financial risk much more accurately.

The Future of Open Banking in the U.S.

Banking in the U.S. is a decidedly fragmented industry, though the increase in demand for digital banking solutions is making innovation the name of the game as we move into the future.

Open banking would be quite a change for Americans, as it would take down a lot of the existing barriers between financial data and the consumers and third-party entities that could leverage that data to create more innovative and tailored experiences. But as with any big change, especially ones tied to digital transformation, there are plenty of reservations and obstacles to overcome.

One distinct hindrance to the advancement in this country is the fact that more than 40% of B2B transactions are still carried out using checks. In much the same way that third-party payment applications like PayPal needed to build consumer trust while touting the innovation and ease of use that accompanied them, open banking and secure financial data sharing will need to continue evolving.

Open banking is likely going to be a reality in the near future for Americans in much the same way that it has taken hold globally – slowly, but surely.

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