When the words “open” or “smart” get added to other words, it’s often with mixed results.

However, the concept of “open banking” may have genuine staying power and a positive, industry-wide influence in the financial services sector. So what is it? And what does it mean for bank, credit card and credit union customers all across the world?

What Is Open Banking?

A reductive definition of open banking is that it provides a system under which financial data is mobile, secure and easily shared, with permission, between the user and first- and third-party institutions, services or applications.

This secure platform for sharing banking information provides a host of potential advantages for the customer and financial institutions alike. These include:

· Better compatibility with tools and insights from third parties that can help banking customers save money faster or more effectively

· A chance for banks to speed up loan application times and make it easier for customers to borrow and repay money.

· Faster and more secure payments between users, including disbursing payments and issuing invoices to business partners

For many people, the checking account is their primary vehicle for accepting and making payments and paying for goods each day.

With checking and savings accounts, as well as traditional banking, every transaction goes through the primary financial institution. It is as centralized as a banking system can be, and a significant part of why cryptocurrency’s decentralized model is demonstrating lasting popularity.

Open banking isn’t the same thing as cryptocurrency, although blockchain’s decentralized ledger may soon play a role in further improving open banking standards.

Instead, open banking could represent a compromise between traditional, closed, centralized banking and the entirely unregulated financial services landscape promised by cryptocurrency.

Where Does Open Banking Exist Now?

The United Kingdom implemented an open banking system in early 2018. The intent of the reform was threefold:

· To improve the quality and speed of services by requiring major banks to share data, under specific circumstances approved by the user, with third-party financial services providers.

· To level the playing field by allowing smaller FinTech service providers or app builders to credibly compete with the services offered by more established names in the financial services sector.

· To encourage the development of secure, well-developed APIs that allow digital applications and online financial services from different vendors to interact, share data and quickly move funds between them as needed.

Traditional, closed-off banking is becoming a little less common in the U.S. Even so, there are no federal-level requirements, like the U.K. has, making this type of functionality and compatibility mandatory.

In the U.K., it is more common for primary financial institutions to work in better harmony with external applications, budgeting software, asset and retirement planning tools, small business accounting systems and other products and services.

How Does Open Banking Work, and What Are the Implications?

Open banking must be, first and foremost, secure. That means developing industry-standard, secure and open APIs and digital standards to allow hundreds or thousands of financial products and services to “talk to” one another. In the U.K., major financial institutions received a one-year ultimatum from the government to develop secure APIs for use by vetted third-party providers.

Achieving industrywide digital compatibility was only one goal of implementing open banking. Security was another. Not just any U.K. FinTech startup can implement open banking APIs and begin accessing personal financial data, however.

Instead, the third-party provider (TPP) must receive pre-authorization from the open banking institutions. Plus, users themselves must grant permission to the TPP each time someone requests data. The U.K.’s implementation of open banking borrows some ideas from GDPR.

But what about the real-world implications of open banking for the user?

Many of us have already experienced open banking without realizing it. Here are some real and hypothetical examples:

· Budgeting apps like Mint and You Need a Budget use open banking to read, flag and track user transactions from savings accounts, checking accounts and credit cards. Early on, apps like these required credentials and screen scraping to do their work. Modern APIs powered by true open banking can provide a much faster, more reliable and less resource-intensive user experience.

· Some FinTech startups are choosing to focus on artificial intelligence tools for open banking cybersecurity. These tools interface with checking, savings and other banking products from a variety of institutions and use machine learning. They comb business or individual account reports to automatically flag suspicious activity.

· Open banking streamlines the lending process for individuals and small businesses by granting lenders one-time access to banking records in real time to judge creditworthiness and other factors. Previously, approving loans and other financial products involved exchanging financial reports that don’t necessarily reflect reality by the time the lender reviews them.

We will soon see many other examples of FinTech companies capitalizing on the opportunities presented by open banking, with or without a government mandate.

It’s safe to say that tomorrow’s budgeting, retirement planning, savings, invoicing, lending, company financial tracking and enterprise planning tools will be considerably more useful, faster and easier to implement than they are in today’s comparatively much more restrictive banking environment.

The Potential of Open Banking, Plus Two Caveats

Naturally, there are some less positive implications for banking sector customers as well. As with the deregulation of the electricity market, which resulted in deceptive introductory prices and fly-by-night energy providers, open banking might encourage misleading sales tactics.

As discussed, TPPs must “prove themselves” before a bank grants them access to its APIs. But even after they do, users still must agree to provide details about their financial life to outside parties. These parties exist to provide financial advice or recommend relevant banking products, or often both.

Banking customers must exercise caution when linking their bank accounts with TPPs, since even well-vetted companies have the motivation to funnel users toward profitable products and services rather than, necessarily, what’s in the user’s best financial interests.

There’s also the caveat that all this functionality is only as secure as the design of its APIs allows. Compromised APIs can expose user communications and data and help outside parties launch DDoS attacks. There is a good reason authentication and security were a priority as the U.K. drafted its open banking proposals.

By and large, however, these worries appear manageable. The opportunities presented by open banking paint an encouraging picture for financial companies, FinTech companies and, of course, banking customers everywhere.