Open banking in Europe: Transforming finance for businesses and consumers
Open banking in Europe is changing how people and businesses manage money. By sharing data between banks and licensed third-party applications, open banking allows users to access a range of innovative financial services – direct payments to personalised budgeting tools.
This guide explores the basics of open banking in Europe, its benefits, its regulations, and why it’s becoming more and more popular among businesses and consumers.
What is open banking?
Open banking is an ecosystem that allows traditional banks to securely share customer data with authorised third-party providers (TPPs) via APIs (Application Programming Interfaces). This only happens with customer consent. Previously, traditional banks held a monopoly over customer data.TPPs, which can be anything from budgeting apps to payment processors, use the data to create financial services tailored to users’ needs.
In Europe, open banking is regulated. With the introduction of PSD2 (the Second Payment Services Directive), the data sharing via APIs became mandatory for banks.
How open banking works in Europe
At its core, open banking relies on APIs to connect banks with approved third-party services. Here’s how it works in a few simple steps:
- Customer consent: A user grants permission for a third-party app to access their bank account data or initiate payments. This is always done securely, with clear consent from the user.
- Secure data transfer: Once permission is granted, data flows through regulated APIs from the bank to the third-party app. This data is encrypted and shared securely, ensuring user privacy.
- Service delivery: The third-party app uses the bank data to provide services, like budgeting, payment processing, or financial planning, giving users access to a range of personalised tools.
Key benefits of open banking in Europe
Open banking brings a range of benefits for both consumers and businesses, from greater control over finances to improved customer experiences.
Faster, more affordable payments
Open banking allows direct bank-to-bank transfers, which bypass traditional card networks. This leads to faster payment processing and reduced fees. For businesses, this means lower transaction costs, quicker access to funds and reduced chargebacks, while consumers enjoy a more streamlined checkout process.
Better security
Security is a top priority in open banking, especially in Europe where strict PSD2 regulations apply. All transactions are protected by high levels of encryption, strong customer authentication (SCA) and customers must provide explicit consent before data sharing occurs.
Financial insights
For consumers, open banking means a clearer view of their finances. For example, in one use case of open banking – budgeting tools – open banking allows customers linking all bank accounts and seeing a unified overview of spending, savings, and income in a single app.
Personalised services
Open banking data allows third-party providers to offer more personalisation. For example, a budgeting app can analyse spending patterns and suggest saving opportunities, or a lender can use account data to offer tailored loan options.
More innovation
Open banking promotes competition in the financial industry by allowing fintech companies to offer services traditionally provided by banks. This competition pushes both banks and fintechs to innovate, creating new products that benefit consumers.
Open banking regulation in Europe
PSD2, enforced in 2018, is a European Union regulation that mandated European banks to open their data to authorised third-party providers through APIs, enabling open banking across the EU. PSD3 – an update to the current regulation – is currently in the draft stage and is expected by the end of 2024.
As part of PSD2, Strong Customer Authentication (SCA) is mandatory for open banking transactions in Europe. SCA requires users to verify their identity using two or more authentication factors, such as a password and a fingerprint, or a phone number and a one-time code.
GDPR is another crucial regulation in European open banking, focused on data privacy. Under GDPR, companies must protect personal data and provide users with control over how their information is used. For open banking, this means customers have the right to know who accesses their data and can withdraw consent at any time.
Common use cases for open banking in Europe
Open banking has a variety of practical applications that benefit both consumers and businesses. Here are some popular use cases:
Personal finance management
Open banking enables users to link multiple accounts into a single view, allowing them to monitor income, expenses, and savings in one place. Many budgeting apps use open banking to offer personalised financial insights and tools.
Open banking payments
For businesses, open banking provides a fast and low-cost payment alternative to card payments. Direct bank transfers (often referred to as “pay-by-bank”) reduce transaction fees and speed up settlements, improving cash flow. Many e-commerce and service platforms now offer open banking as a payment option for these reasons.
Lending and credit services
Open banking allows lenders to access a borrower’s financial data with permission, enabling more accurate risk assessments. This streamlined access helps lenders offer personalised loans, often with better rates, while reducing the need for lengthy paperwork.
Future of open banking in Europe
The future of open banking in Europe is bright. As more banks embrace open banking and consumers become familiar with its benefits, new use cases will emerge. Future trends may include:
- Expanded regional coverage: Open banking is expected to grow beyond the EU as more regions adopt similar regulations.
- Improved user experience: With more user-friendly interfaces and seamless integration, open banking will become easier and more intuitive.
- Broader range of services: Beyond payments and budgeting, open banking will likely enable new financial products and services tailored to individual needs.
Final thoughts
Open banking in Europe is reshaping the financial landscape, providing consumers with more control, businesses with greater flexibility, and the industry with a new standard for secure transactions. By making payments faster, safer, and more cost-effective, open banking is setting the stage for a future where finance is more connected and customer-centric.
