Open Banking: What is it and why should you care?


Since 2018, Open Banking has empowered businesses and individuals to consent to share their banking and financial information with third party providers. By combining the strengths of banks with those of fintech firms, Open Banking has increased innovation, competition and efficiency in the financial services space.

But there can be hesitancy to use Open Banking. Understandably, some feel that it could be a security risk to share their private financial information with a business other than their bank.

However, with a more comprehensive understanding of Open Banking, even the most sceptical buyers and sellers would have a hard time denying its value. This guide provides that understanding – we define Open Banking and consider how it works in the context of B2B, so you can use the technology with confidence.

What is Open Banking?

Open Banking is a regulatory framework that aims to promote greater competition, innovation and choice in the banking and financial services industry. It enables businesses and individuals to consent to sharing their financial data between different financial institutions and third-party developers through standardised application programming interfaces (APIs).

The idea is that Open Banking gives customers (consumers and businesses) more control over their financial data and enables them to securely share that data with other financial service providers. Traditionally, only banks had access to this data, but Open Banking makes it accessible to fintech companies and other financial institutions. The result? Third-party providers can offer innovative financial services that might not have been available through traditional banking channels, enriching the customer experience and driving competition.

In the UK and Europe, Open Banking was made possible by the introduction of the second payment services directive (PSD2), which was proposed by the European Commission in 2016 and took effect across the EU from 2018. PSD2 established a framework that mandated banks to grant third-party providers access to their customers' financial data, enabling non-bank businesses to take advantage of a payments ecosystem that was more open and accessible than before.

Open Banking regulations and implementations vary from country to country. Some regions, like the European Union and the United Kingdom, have introduced specific regulations and frameworks to govern Open Banking practices and ensure customer protection. These regulations often require banks to provide APIs for sharing customer data and mandate strong security measures to safeguard sensitive information.

How B2B sellers benefit from Open Banking

Open Banking is characterised by a number of key benefits for B2B sellers that we explore in more detail below.

  • Transaction efficiency: Open Banking APIs enable faster and more efficient payment processes. The result? Smoother cash flow management and reduced time between purchase and receipt of payment.
  • Safer lending: Open Banking allows buyers to provide lenders with real-time financial data that increases the accuracy of credit decisions
  • Access to financing: On the other side of that coin – Open Banking improves the ability of sellers to access loans and financing options from their own suppliers.
  • Financial innovation: Businesses can access innovative financial products and services that cater to their specific needs, such as specialised accounting software and automated expense management.
  • Data-driven decision making: Open Banking provides businesses with valuable financial insights that can help them make strategic decisions, optimise operations and identify growth opportunities.
  • Reduced admin: Automating processes such as data reconciliation and invoice management reduces administrative burdens and frees up time for more strategic tasks.
  • Emphasised security: Open Banking places a strong emphasis on security for all parties. Buyers can grant and revoke access to their data at any time, while banks must adhere to strict security protocols to ensure data privacy and protection.

How does Open Banking work?

Here's how an Open Banking interaction generally works:

  1. A customer gives explicit consent to share their financial data with a specific third-party provider. 
  2. The financial institution (e.g., a bank) provides a set of APIs that allow authorised third-party providers to access specific data and services.
  3. The bank's API verifies the authenticity of the third party and checks if the customer has granted permission for data sharing.
  4. Once authenticated and authorised, the third-party provider can request specific data such as balances, transaction history or direct debit information from the customer's bank.
  5. The third-party processes the data in order to fulfil the customer’s request. This might be to process a payment, provide credit or offer personalised services such as budgeting or investment advice.

Use case: How Open Banking can be used in B2B BNPL

Real-time transaction data, automated reconciliation and lightning-fast APIs make Open Banking a boon for the B2B Buy Now, Pay Later space. Below are some of the key ways that BNPL providers make use of Open Banking. 

  • Credit scoring: Financial institutions can use Open Banking data to assess the creditworthiness of business clients more accurately by analysing up-to-date transaction history.
  • Fraud assessment: Real-time transaction data can be analysed to detect irregularities and potential fraudulent activity.
  • Payments processing: Open Banking APIs can automate the reconciliation process by directly accessing transaction data from different banks, reducing errors and manual effort.
  • Customised services: B2B BNPL providers can offer customised credit limits and payment terms based on real-time transaction data and business needs.
  • Faster decision-making: Open Banking APIs can facilitate real-time credit decisions, improving the customer experience.
  • Higher credit limits and offer rates: Real-time data enables BNPL providers to offer credit to young or small businesses that might otherwise have been shut out of lending schemes.

Want to learn more?

Just as the full benefits of Open Banking are yet to be realised, we’ve only begun to scratch the surface of Open Banking in this blog post. Want to learn more about open banking and its applications in the world of B2B payments?

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