Bank data & compliance
Open Banking: Definition & Example
What Is Open Banking?
Open banking is the practice of letting consumers securely share their bank account data, such as balances and transactions, with third-party apps and services they choose, usually through APIs.
What does open banking mean?
Before open banking, sharing account data usually meant handing over a username and password so an app could log in and scrape the bank’s website. Open banking replaces that with secure connections, typically APIs, where the consumer authenticates with their bank and grants a specific app permission to access specific data.
Data aggregators such as Plaid, MX, and Finicity sit between banks and apps, maintaining connections to thousands of institutions. Consumers use open banking to link budgeting apps, pay with bank transfers, get loans based on cash flow, and share income information with landlords or lenders.
The UK and EU mandated open banking through regulation. In the U.S., it grew mostly through industry agreements, and the CFPB’s Section 1033 rulemaking on personal financial data rights aims to set formal rules for how consumers can access and share their data.
Open banking example
A rental applicant receives a link from a property manager. She selects her bank, logs in on the bank’s own screen, and approves read-only access to her checking account. The service analyzes her deposits and produces an income report. Her password is never shared with the landlord or the app.
Related terms
- Consumer-Permissioned DataConsumer-permissioned data is financial information a consumer actively authorizes a third party to access, such as bank transactions shared through an open banking connection.
- Account AggregationAccount aggregation is collecting data from a person’s accounts at multiple financial institutions into one place, with their permission, so balances and transactions can be viewed or analyzed together.
- Section 1033Section 1033 of the Dodd-Frank Act gives consumers a right to access their own financial account data. The CFPB’s rule implementing it sets requirements for sharing that data with authorized third parties.
- Read-Only Bank ConnectionA read-only bank connection lets an app view account data, such as balances and transactions, without being able to move money, make payments, or change anything in the account.
- Access TokenAn access token is a credential an app receives after a user grants permission, letting it call an API on the user’s behalf, such as reading bank data, without ever handling the user’s password.
Open banking FAQ
- Is open banking safe?
- Open banking connections are designed so apps never see your bank password and only receive the data you approve. As with any service, check who you are sharing with and how long they keep the data.
- What is an example of open banking?
- Linking your bank to a budgeting app, verifying an account for a bank transfer, or letting a landlord’s income tool read your deposits are all examples.
- Is open banking the same as Plaid?
- No. Plaid is one company that provides open banking connections. Open banking is the broader practice of permissioned data sharing.
