Open Banking Use Cases: From E-commerce to Lending

Open banking is an innovative framework in finance that’s gaining momentum worldwide. In open banking, provided consumer consent, traditional banks share data with licensed fintech companies. The result is better, more personalised products and services.

The rising adoption of open banking globally proves its effectiveness across industries. Here, we take a look at the key use cases for open banking, from personal finance tools to income verification methods and digital payments.

What is Open Banking?

The idea of data sharing first appeared in Europe, which is often named the cradle of open banking. The groundbreaking PSD2 regulation mandated European banks to open their Application Programming Interfaces (APIs) to licensed fintech firms, legally named third-party providers (TPPs). The directive was enforced in 2018.

Open Banking APIs are sets of defined rules that enable entities to communicate with each other. They function as a software bridge within the open banking ecosystem, enabling banks to share data securely.

The result of open banking is a win-win. Customers grant their consent, and in turn, fintech companies create personalised products and streamline user experiences. Previously, banks held a monopoly over customer information.

Open Banking Use Cases

The popularity of open banking is gaining momentum. In 2023, the adoption in the UK reached a record high, with 11% of British consumers being active users and 17% of small businesses, according to the latest Open Banking Impact Report.

The open banking use cases are versatile and span across the business landscape. Both companies and consumers value its benefits, and there is a lot that can be done with open banking.

Digital Payments

One of the best examples of open banking at work is digital payments. One type of license a fintech may obtain is to become a Payment Initiation Service Provider (PISP). PISPs are able to access read-only financial data and initiate payments on their behalf.

This enables simplified payments and user experience as consumers no longer need to insert their card details. PISP providers, like Noda, are popular among e-commerce merchants who want to streamline online payments.

Financial Management

The payment initiation may also be valuable for automating investments and savings. Instead of manually paying into an account every month, a user can authorise their provider to initiate payments on their behalf, helping in financial management.

The second license a fintech company may obtain is to become an Account Information Service Provider (AISP). They are authorised to view and access financial information but cannot initiate payments.

This functionality is especially useful for budgeting tools and payment reconciliation for both consumers and businesses. AISPs can gather information from multiple bank accounts and institutions, putting it all in one place. As a result, users can access and analyse their financial data and transactions within a single interface.

Lending

Another open banking use case related to the AISP functionality is simplifying lending. In order to give a loan, lenders need to undergo a lengthy process of analysing a borrower’s credit history and income. Yet open banking is posed to change this.

As open banking providers can aggregate financial data, they can instantly provide all the necessary information to lenders in just a few minutes. Open banking can streamline credit history checks, affordability and income verification in all types of lending.  This results in more efficient operations for businesses and higher approval rates for consumers.

Compliance

Open banking can streamline compliance, fraud prevention and KYC processes. Know Your Customer (KYC) is a set of measures to ensure one doesn’t work with businesses or individuals involved in illegal activity.

With just a few clicks, open banking can provide a comprehensive view of a client's transaction history, including details about their payees and locations. This can simplify retrieving user information, validating sources of wealth, providing transactional data, and evaluating risk profiles.

Plus, open banking eradicates the need for paper documents, which are more vulnerable than their digital equivalents.

Which Industries Benefit from Open Banking?

• Financial Technology: Open banking allows fintech companies to access vast amounts of data and develop more innovative products. 
• Financial Services: The industry, especially financial management tools, benefits from data sharing and improved customer insights. With open banking, they can provide more tailored advice.
• E-commerce: Digital merchants can enjoy simplified payment processes powered by open banking. They can offer their clients a better user experience.
• Mortgage Lending: Lenders can have immediate access to a borrower’s financial information, increasing the speed of mortgage approval, and reducing paperwork and labour needed.
• Business Lending: With open banking, lenders can access a company’s creditworthiness with less time and effort.
• Consumer Lending: Again, in consumer lending, open banking provides a more accurate and rapid assessment of loan applications.

Open Finance: Use Cases

Open finance is an expansion of open banking into other sectors of finance: investments, pensions, insurance, and more. It is governed by the same principles of secure sharing of data and mandatory customer consent.

Open finance hasn’t been globally implemented, and a rare example of adoption is Brazil. In March 2022, the country launched its final open finance implementation phase, including investments, insurance, and pension data into the infrastructure. As of 2023, there are already more than 5.2 million Brazilians with active consent for data sharing.

Some of the use cases for open finance include account aggregation that includes all financial accounts, including investments, pensions, insurance, and others. Another use case is embedded finance, for example, insurance services integrated into the digital journeys of other platforms.

Open Banking with Noda

Elevate your business with Noda’s payments and open banking solution. Our all-in-one platform prioritises customer understanding, efficient operations, and growth.

Noda is a worldwide payment and open banking provider for seamless business transactions. From payment facilitation to financial analytics, Noda has got you covered. Our platform uses cutting-edge AI and machine-learning technologies. Your payments are our priority.