Open banking is becoming a new source of innovation that is aimed at shaping out traditional banking. Open banking is the method of banking where third-party financial service providers have access to consumer transactions, banking, and other financial information from non-bank and bank institutions. These third parties access the information through the application programming interfaces (APIs) (Zachariadis & Ozcan, 2017). It allows the control of clients’ financial and banking accounts through third-party applications. Clients need to consent to share their information mainly by ticking a box on the online mobile applications. The third parties then get banking and financial information of these clients then use to give financial service options to the consumers, create marketing profiles, make changes to the account, and conduct new transactions on behalf of the customers. The introduction of open banking is likely to have several gains and disadvantages while, at the same time, it is likely to have severe risks. This paper will discuss the various risks of open banking and how they can be avoided.
The main concern of open banking is the security and the privacy of the clients’ finances. Unlike the traditional banking methods, open banking is diverse (Zachariadis & Ozcan, 2017). It includes digital banks, third-party providers, fintech firms, credit bureaus, data aggregators, healthcare firms, retail stores, telecommunication firms, and payment networks. Some of these firms do not follow the standard privacy protocols or the rule and regulations governing healthcare data. Additionally, some of the firms use the client’s data for the wrong purposes. Additionally, it is difficult to pin data breach to any single party with this many parties in the open banking process. Failure to select the right partners may lead to poor legal agreements concerning the sharing of data, leading to reputational risk.
Open banking involves complex transactions that are more prone to process risks. The less complex transactional process may be faced by the risk of misuse of consumers’ data by third-party providers. Some of the third parties may misuse the information handed to them by the financial institution and use it for the wrong purpose. Additionally, it is difficult to trace the manner in which the client’s data has been used as well as failure to control the process execution. Some third-party providers may also illegally get their hands on the clients’ information, and there is a lack of accountability between all the involved parties. Since open banking involves the use of devices such as phones and computers, it is prone to risks as a result of poor data security in these devices (Zachariadis & Ozcan, 2017). The more complex transactions take time and have the open status for days, and they need a large number of data transmittals and the support of several analytic models.
Open banking brings together parties from different sectors of the economy, such as healthcare and retail. Different sectors have separate governing bodies with different regulations. Therefore, it isn’t easy to apply all the governing bodies’ regulations when these firms come together. It also becomes challenging to decide what regulations and the transaction’s point will be considered. Also, it is difficult to determine which party will incur the losses of wrong data usage in any particular transaction. Finally, open banking has several technology risks. Executing open banking requires the use of technological developments to make it efficient and high-performance (Zachariadis & Ozcan, 2017). However, it is a challenging task to come up with a properly functioning system that is user-friendly. Furthermore, the system needs to accommodate all the parties involved and keep up with the increase in the volumes of consumers and third-party providers.
For open banking to be successful, all the risks mentioned above should be considered to develop a working model. The next few paragraphs will discuss solutions to the dangers posed by open banking. Governments should form governing bodies that oversight all the fintech and banks that want to be part of open banking. The governing bodies come with regulations that govern these firms and the whole process, as well as constantly review if the firms meet the standards required to be part of open banking. The banking regulations should also enforce the rule and regulations and maintain a high level of security (IFC, 2017). Banking firms should also make good use of modern technology and Artificial Intelligence. Banks already have systems in place to identify and verify their customers before they carry out any transactions. They should, however, use more thorough systems that are user-friendly for this purpose. Additionally, banks should take advantage of AI to monitor illegal activities and unusual patterns in the client’s accounts. AI becomes more knowledgeable as they get more information making them the best solution to security risks of open banking.
Complex authorization and verification systems should be utilized (Zachariadis & Ozcan, 2017). Unlike the traditional system that requires a password or pin to gain access to an account, more complex models have been developed. For example, in some cases, one is required to use biometrics to gain access, while in other cases, a text is sent to the holder of the account. These methods have helped reduce the security concerns of open banking. Additionally, APIs need to be more secure according to the given standards. They need to have the technical authorization, consent management, and user authentication (Zachariadis & Ozcan, 2017).
Fintech companies also have a role to play in minimizing the risk of open banking since they are significant players. The main problems associated with fintech companies or third-party firms are legal and reputational risks. To avoid legal risks, fintech companies should adhere to all the regulations of the governing bodies, especially those of data privacy. They should collect the client’s data only with their consent and use this data for the intended purpose only. Similarly, fintech companies can avoid reputational risks by getting into partnerships with firms that have good reputations and banking firms that adhere to the set rules and regulations.
Open banking is beneficial in the smooth running of transactions between consumers, banks, and third-party firms. However, for it to work, it is necessary to create safe, trustworthy, and honest relationships between all the involved parties (Bologna, 2019). This healthy relationship will make open banking the next banking system and help reap more benefits, especially to the consumers.
References
Bologna P., (2018) Banks’ maturity a transformation: risk, reward, and policy
IFC, (2017) Data Analytics and Digital Financial Services.
Zachariadis M., Ozcan P., (2017) The API Economy and the Digital Transformation in Financial Services: The Case of Open Banking
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