What is open banking, and how will it affect you?

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What is open banking?

Open banking is a concept that lets you share your bank data with another company’s app just as easily as an elevator button whisks you to the floor of your choosing. It’s designed to make using a fintech app, like Venmo or Robinhood, more reliable and safer in addition to making switching your bank provider for something cheaper quicker than ever.

Open banking is in its infancy in the U.S. compared to the U.K., but it could change what it means to be a bank, ultimately creating better options for you and your money.

Here’s what you need to know about open banking, including the potential benefits for you.

What’s the latest in open banking, and what’s the significance?

On July 9, the White House made a move in favor of open banking. President Joe Biden issued an executive order that included a provision encouraging the Consumer Financial Protection Bureau (CFPB) to issue rules that let customers download their bank data and take it with them to a competitor.

The executive order marks the latest in an ongoing saga that affects everything in fintech and connects to a small section in the 2010 Dodd-Frank Act.

In Section 1033 of Dodd-Frank, the CFPB is tasked to create regulations related to sharing and accessing consumer financial account data electronically. Biden’s encouragement provides the CFPB with an extra push to prioritize the work that the bureau has already been doing.

In October, the CFPB issued an advanced notice of proposed rulemaking tied to developing regulations related to data-sharing. The bureau, which had been studying the issue for years, has collected feedback, but next steps aren’t yet clear. A rule could still take years to implement. What’s at stake is how well your money-related apps work.

Bankrate insight
Open banking is a concept that lets you share your bank data with another company’s app. It could make using your favorite fintech apps more reliable and safer.

Decades ago, the way you kept up with the comings and goings of your money involved monthly mailed bank statements and a physical checkbook. Now, you can log in to a mobile banking app or use another app, like Mint, to see your various financial accounts in one portal. For the experience to work, however, you have to share the keys to your most important digital portal — your bank account — so the app can grab your data. It’s known as screen scraping, and it reveals all the information in your bank account to another company. It has been compared to handing your car keys to a perfect stranger.

Over the years, numerous banks have been accused of blocking companies from collecting your data when you wish to share it with them. Fintech companies have argued that financial institutions are anti-competitive, while banks have said they are just trying to protect their customers from a practice that is not only a security risk but laced with liability issues yet to be ironed out when there is a data breach.

In more recent years, banks and fintech companies have softened the dynamics by forming partnerships to make the data-sharing practice safer in the absence of regulation. But there is still heated discussion about whether financial institutions are sharing enough data in the newer data-sharing model.

What are the possibilities with open banking?

Open banking is meant to let you share your data in a safer and more reliable way than handing over your bank login and password to a third-party app — including another bank app. It’s behind the scenes, so you likely won’t notice anything when you log in to an app to pay back a friend or to make an investment.

“The customer doesn’t do anything different,” says Don Cardinal, a managing director at the Financial Data Exchange (FDX), an industry consortium of financial institutions, fintechs, data aggregators and other stakeholders. “You still have an app on the phone. …What’s different is it is a lot safer in that you aren’t over permissioning data and you aren’t sharing credentials to anybody.”

The ability to easily share your financial data with other companies is expected to spark more innovation in all areas of personal finance. For example, it could help a wider audience secure a loan by crunching their transaction histories to underwrite their credit risk when their traditional credit score might have denied them credit otherwise (such is the case with Experian Boost). It could also make the mortgage application process take considerably less time by using data to digitally verify an applicant’s bank account assets and pre-filling in information.

Open banking would make for a profound change in financial services. It requires financial institutions to spend money on rethinking the way they guard their assets and customers’ data, potentially cannibalizing their business lines that have historically relied on a degree of consumer lock-in.

How will open banking affect me?

Ultimately, open banking is designed to make it simpler for you to switch lenders and use fintech apps.

“Open banking isn’t something wonky that you only need once when you apply for a mortgage,” says Jane Barratt, chief advocacy officer at MX, a banking data analytics company. “It means you can use the data that you have, it’s yours, and share it with companies that you think can help you improve your financial health. Whether it’s access to cheaper forms of credit, whether it’s to use different money management tools or whether it’s to set up direct payments. There are a ton of  things you can do that makes your money more automated and it is all based on data availability.”

According to McKinsey Global Institute analysis, open banking could benefit consumers by:

  • Increasing their access to financial services.
  • Saving them time when opening an account or taking out a loan.
  • Offering them better products.

It’s unlikely you will notice a change any time soon, especially since you likely already share your bank data with other apps. But, in time, your experience in using outside apps is expected to become more secure and reliable thanks to open banking. Expect to get better banking options and accomplish financial chores in less time, too.

It’s a movement many believe is overdue for an industry destined for a digital overhaul.

“We have self-driving cars. We trust our lives to a car and computer to drive down the highway,” Barratt says. “But when it comes to managing money, we still have to rely on three different apps and an Excel spreadsheet. There is a lot of opportunity for tech to truly reduce the mental load on money management.”

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Written by
Mary Wisniewski
Banking editor
Mary Wisniewski is a banking editor for Bankrate. She oversees editorial coverage of savings and mobile banking articles as well as personal finance courses.  
Edited by
Senior editorial director
Reviewed by
Professor of finance, Creighton University