Have you ever used a budgeting app that automatically pulls in all your transactions from different bank accounts and credit cards? Or applied for a loan online and securely linked your bank account to verify your income in seconds? If so, you’ve experienced the power of a major financial innovation that is quietly transforming how we manage our money. This technology is called open banking.
At its heart, open banking is about giving you more control and transparency over your own financial data. It’s the driving force behind many of the convenient financial apps and services that are making personal finance simpler and smarter. At Remitly, we believe that understanding these new tools is key to making empowered financial decisions. This article will demystify the topic, explaining in simple terms what open banking is, how it works, its benefits and risks, and what it means for the future of your finances.
What is open banking?
Open banking is a system that allows you to securely share your financial data from your bank with other authorized financial technology companies (fintechs). It operates on a simple but revolutionary principle: you own your financial data, and you should have the right to control who can access it and how it’s used.
The core idea
For decades, your financial data—that is, your transaction history, account balances, and payment records—was locked away inside your bank’s digital vaults. To use another financial service, you either had to manually input all that information or, in some risky cases, share your bank username and password directly with a third party (a practice known as “screen scraping”). Open banking changes this. It creates a secure and standardized way for your bank to share specific data with another company, but only with your explicit consent. You are always in the driver’s seat.
The technology behind it
The technology that makes open banking possible is the Application Programming Interface, or API. While it sounds technical, the concept is quite simple. Think of an API as a secure messenger or a waiter in a restaurant. The process goes like this:
- You (the customer) tell the waiter (the app) what you want; for example, “I’d like to see my last 30 days of transactions.”
- The waiter (the app’s API) takes your request to the kitchen (your bank’s secure system). The kitchen never lets the waiter just wander around; it only accepts specific, authorized requests.
- The kitchen (the bank) prepares your order (gathers the requested transaction data).
- The waiter (the API) securely brings the data back to you within the app.
The API allows two different systems to talk to each other in a controlled and secure way without either side having to share its secret recipes (or in this case, your login credentials).
A real-world example: your budgeting app
The most common example of open banking in action is connecting a budgeting app like Monarch, YNAB, or Copilot Money to your bank account. When you sign up, the app asks for your permission to connect to your bank. You log in through a secure portal hosted by your bank, select which accounts you want to share, and give your consent. From then on, the budgeting app can use an API to automatically and securely pull your transaction data, categorize your spending, and show you a complete picture of your financial life in one place.
How does open banking work?
The open banking process is designed with security and consent as its cornerstones. It generally follows a clear, three-step process that keeps you in control.
Step 1: You grant permission
It all starts with you. An open banking connection is never made without your knowledge. When you use a fintech app or service, it will ask you to connect your bank account. You will be directed to a secure portal where you log in with your actual bank credentials. This portal will clearly state which company is requesting access, what specific data they want to see (e.g., account balances, transaction history), and for how long. You must explicitly agree to these terms before any data is shared.
Step 2: The bank provides a secure gateway (the API)
Once you give consent, your bank uses its secure API to open a protected channel for the third-party app. This API is designed to only share the specific data you approved. For example, if you only gave permission for “read-only” access to your checking account transactions, the app cannot see your savings account, nor can it initiate any payments or move money on your behalf. This is an important security feature of a proper API in banking.
Step 3: The app delivers a personalized service
With secure access to your data, the third-party app can now provide its service. This could be creating a detailed budget, analyzing your spending habits, verifying your income for a loan application, or aggregating all of your financial accounts into a single dashboard.
The regulatory landscape: A US vs. global perspective
It’s important to note that the open banking framework looks different around the world. In Europe, open banking is mandated by a regulation called PSD2. In Australia, it’s governed by the Consumer Data Right (CDR). In the United States, the approach has been more market-driven. While there isn’t one single law, the industry is moving in the direction of open banking, led by financial data companies like Plaid and Finicity, which build the APIs that connect thousands of banks with popular fintech apps. The US government is also taking steps to formalize regulations, with the Consumer Financial Protection Bureau (CFPB) working on rules under Section 1033 of the Dodd-Frank Act to give consumers a legal right to their financial data.
The benefits of open banking for you
This new way of sharing data unlocks a wide range of benefits for consumers, making financial management easier, more transparent, and more personalized.
A complete view of your finances
Many of us have accounts at multiple institutions—a checking account at one bank, a credit card from another, a 401(k) with an investment firm, and maybe a student loan somewhere else. Open banking allows you to securely link all of these accounts to a single app, giving you a comprehensive, real-time dashboard of your entire financial life for the first time.
Smarter financial tools and insights
With access to your complete financial picture, apps can provide powerful insights and services. They can:
- Automate your budget by categorizing spending and tracking it against your goals.
- Identify wasteful subscriptions you may have forgotten about.
- Analyze your cash flow to predict when your account balance might run low.
- Automate your savings by rounding up your purchases to the nearest dollar and transferring the change to a savings account.
Easier and faster loan applications
Traditionally, applying for a loan required gathering and submitting piles of paperwork like bank statements and pay stubs. With open banking, you can grant a lender temporary, secure access to your bank account to digitally verify your income and cash flow in minutes. This can streamline the approval process for mortgages, personal loans, and auto loans.
Increased competition and better products
Open banking levels the playing field, allowing innovative fintech startups to compete with large, established banks. This increased competition is great for consumers. It pushes all financial institutions to offer better products, more transparent services, and lower fees to win and keep your business.
Drawbacks and challenges: Is open banking safe?
With any system that involves sharing data, security and privacy are paramount concerns. While open banking is designed to be secure, it’s important to understand the risks and protections.
Data privacy and security concerns
The primary concern is the risk of a data breach. If a third-party app with access to your financial data is hacked, your information could be exposed. This is why it’s imperative to only use reputable apps and services that have strong security practices.
How your data is protected
The open banking ecosystem is built on multiple layers of security to protect your information:
- Bank-level security: The APIs are built and maintained by banks with the same high-level security they use for their own online banking services.
- Encryption: All data transmitted through an API is encrypted, making it unreadable to anyone who might try to intercept it.
- Tokenization: Instead of sharing your actual bank login credentials, the system uses secure “tokens” that grant specific, limited permissions. If a token is compromised, it can be revoked without your bank password being exposed.
- Consent and transparency: You must always give explicit consent, and you have the right to revoke access at any time through your app’s settings or your bank’s security dashboard.
The risk of uneven adoption
In the US, not every bank has adopted modern, secure APIs. Some smaller banks or credit unions may not yet be part of the open banking network, which can limit their customers’ ability to connect to popular financial apps.
What does open banking mean for small businesses?
Open banking isn’t just for individuals; it offers powerful tools for small and medium-sized enterprises (SMEs) as well.
Streamlined accounting: Businesses can connect their bank accounts directly to accounting software like QuickBooks or Xero, automating bookkeeping and reconciliation.
Faster access to financing: Lenders can use open banking data to get a real-time view of a business’s cash flow, making it easier to approve business loans and lines of credit quickly.
Simplified payment processing: Open banking enables new and more efficient ways to process payments from customers directly from their bank accounts.
Final thoughts: Taking control of your financial future
At its core, open banking is a shift in power. It moves the control of your financial data from the banks to where it belongs: with you. It allows you to leverage your own information to get better services, smarter insights, and a more complete understanding of your financial life.
While the term itself may be new to you, the benefits of open banking are likely already a part of your digital life. As this technology continues to evolve into a broader “open finance” ecosystem, it will unlock even more personalized and powerful ways to manage everything from your bank accounts to your investments and insurance. By understanding how it works, you can confidently and securely use these innovative tools to build a stronger financial future.
FAQs
What’s the difference between open banking and traditional banking?
Traditional banking keeps your financial data siloed within one institution. You can only access it through that bank’s website or app. Open banking breaks down those silos, allowing you to securely share your data with other apps and services that can provide you with a more holistic view of your finances or offer innovative new products.
Is open banking safe to use?
When done through reputable apps and modern bank APIs, open banking is designed to be very safe. It is significantly more secure than the old method of sharing your username and password with third-party apps. Always look for apps that are transparent about their security practices and only connect your accounts through your bank’s official, secure login portal.
Do I have to pay to use open banking services?
Generally, no. As a consumer, you do not pay to connect your accounts. The fintech apps that use your data typically make money through other means, such as offering premium subscription features, recommending financial products, or charging businesses for their services.
What types of apps can use open banking?
A wide variety of apps use open banking, including budgeting and personal finance apps, investing and savings apps, payment apps, and lending and credit score apps.
How do I know if my bank supports open banking?
Today, virtually every major bank in the US and most smaller banks and credit unions support open banking through intermediaries like Plaid, Finicity, or MX. The easiest way to find out is to simply try connecting your bank account from within a popular financial app. If your bank is listed, it’s part of the network.