min read

The regulatory effects of open banking

Published on
March 28, 2024
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The modern economy is seeing unprecedented digital disruption, and the ever-growing Fintech sector is at the heart of it all, with the RegTech segment leading the way. In order for financial institutions to be able to handle growing data demands and new EU regulations like GDPR and PSD2, they need to invest heavily in RegTech moving forward.

With consumer demand for transparency in data and information collection rising, and the new regulatory changes being implemented, financial institutions are realizing that they can no longer brush aside the potential safety and compliance issues that comes with the latest disruptive trend – open banking.

What is open banking and what’s the buzz about? 

Technically, open banking is a banking practice that gives users the ability to grant third-party financial service providers access to their financial data. In marketing terms, it is a concept that could revolutionize modern banking. While the basics of the practice (like screen scraping) has been around for a few years already, and used in budgeting tools like Mint, it is now the possibility to extract financial information from bank’s sites using an API that is generating buzz.

Now, instead of users giving budgeting apps their bank username and password, APIs would allow third-party providers to plug directly into an app or web service. Simply put, granting authorization to sensitive information and logins replaces actually sharing mentioned sensitive information. Not having to share your username and password with a third party with potentially inferior cybersecurity protocols compared to your bank is a win, and the use of an API also allows connections to stay intact even when you change your passwords. This practice is more beneficial to the third parties as well, as it gives them direct information to the data they want, rather than having to scrape it from another source. With that said, know that the most exciting opportunities extent far beyond just budgeting apps.

What open banking really allows for is a more efficient and secure way to share financial data, and this fact may change the financial world for the better over time. From improving the labor-heavy process of getting a loan, to streamlining many of the complicated payment systems and money management tools that exist today, the possibilities with open banking are seemingly endless.

Open Banking API

Regulating the revolution

Digital disruption in any industry can be chaotic, and Fintech is no exception. While the benefits greatly outweigh the potential risks, it’s not risk-free, and with these advancements comes new rules and fresh takes on existing best practices. As a result, we can likely expect the open banking revolution to come with new regulations.

In fact, in the European market, we already have previews of such regulations. To spur more innovation and competition in the banking sector, the Competition and Markets Authority rolled out the second Payment Services Directive (PSD2). This directive requires enterprise banks to make their data available in a secure, standardized form, so that third-party providers can plug into and leverage that data through APIs. This concept was originally rolled out in 2019 and serves as one example of regulations that are associated with the advancements in open banking.

RegTech to the rescue

Rapid advancements in technology have upended the entire banking industry, and drastically impacted the world of regulatory compliance. With RegTech companies like ZignSec already leveraging solutions like machine learning and AI to solve problems related to compliance, this niche segment of the larger Fintech sector will also serve a crucial role in the overall adaptation to, and implementation of, the open banking concept.

Whether it’s new banking companies looking for a running start or established financial institutions that are looking for ways to stay competitive in an ever-changing landscape, RegTech solutions can help simplify, improve, and even automate the burdensome tasks of things like regulatory research and analysis. Ultimately, the broad range of already available RegTech solutions like ours will allow financial firms to stay on top of regulatory changes related to open banking and get ahead of any upcoming developments as well.

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