The Digital Era is here and it is changing the way we live every aspect of our lives, including our financial choices. We have cryptocurrencies, direct deposits, and now, Open Banking.
The concept of Open Banking has been around for years. You’ve probably heard of it and still don’t know exactly what it means, though.
Open Banking is already rolling out in Europe and is gaining popularity in other countries around the world. You’ll need to know about it soon if you don’t already, so here are the basic facts to help you with your transition to this system.
The Need for Open Banking
The ability to complete all purchases digitally has changed the way people live their lives. The traditional banking system, complete with filling out layers of paperwork and waiting what can be weeks sometimes for approval, is becoming obsolete.
With the shift to digital transactions, people can now apply for loans, pay their bills, and do their online banking in real-time from across the world.
Because of this ability, standard banks are unable to compete with digital lenders. In order to integrate the banking system of yesterday with today’s demands, cutting edge banks are embracing Open Banking.
What is Open Banking?
Pioneering the way into the Open Banking system, the European Parliament heralded in PSD2, or the European Payment Services Directive. The goal of PSD2 was to create one standard, regulated market for payments.
With this regulation, banks, with the consent of their customer, shared their databases to TPPs – Third-Party Providers, under an application programming interface (API). Together, they create a customized service for each customer. They do this under one of two formats: AISPs and PISPs.
- AISPs: Short for Account Information Service Providers, AISPs are licensed organizations that use the banks’ APIs to set up personalized offers for each customer. Personal financial managers through mobile apps are one way this is done, and they’re already in use in some form or other in many countries.
These apps are geared towards helping people to take control of their money. They have their banking info, bills, savings, investments, and other economic data in one place. Through the entire picture put together, AISPs can offer advice and help individuals better understand their finances.
- PISPs: Payment Initiation Service Providers, or PISPs, are the second legalized format. Through PISPs, people can manage all of their payments in one area. These organizations take care of every outgoing transaction through direct bank transfers.
Currently, some banks already offer free direct payments to creditors, but not everyone takes advantage of this. PISPs are the default place that individuals would go to pay their bills instead of heading to each individual company.
In a basic PISP transaction, the customer would give their information to a processor, which would then submit the payment request to the customer’s bank. Just like any transaction, the bank would check the funds available and decide to approve or decline the request.
Because all sensitive data is done through the PISP instead of multiple websites, it’s safer for the customer.
How Can You Transition to This?
No matter where you are, there are ways that you can prepare for Open Banking. If Open Banking systems aren’t available in your area yet, start using your bank’s payment options. Download secure apps to keep your finances altogether. Get used to digital commerce and transactions.
There’s no need to be afraid of change in the form of Open Banking. It’s intended to benefit the consumer over big companies through more personalized financial care.
Working with Open Banking organizations can help you take control of your finances, creating a butterfly effect that benefits everyone.