What is open banking? Everything accountants need to know

If you’re in the world of finance and accounting, you’ve probably heard the term “open banking” a lot lately. That’s because this emerging standard in banking is ushering in a new era of finance technology.

As an accountant, understanding open banking can revolutionize many of your processes, including bank reconciliations, and improve how you manage financial data.  

In this post, we'll define the basics of open banking and how it works, explore its benefits, and show you how it can enhance your workflows.  

Key takeaways:

• Open banking enables the sharing of customers’ financial data across services and platforms, increasing transparency and accessibility.  

• This allows for the development of competitive financial services and drives innovation in the industry.  

• Accountants can use embedded applications to utilize open banking and streamline processes like bank reconciliations.  

What is open banking?

Open banking enables secure data sharing between banks and third-party providers (TPPs). It’s designed to enhance transparency, accessibility, and integration of financial services. This allows financial technology (fintech) companies and other parties to develop innovative financial products and services that leverage customer data, which was previously only available to financial institutions.  

This marks a significant departure from the traditional, siloed approach to banking data (more on this below), fostering a more competitive and innovative financial ecosystem.  

Let’s take a closer look at how open banking works.  

How does open banking work?

At its core, open banking liberates financial data access by using application programming interfaces (APIs) to enable third-party developers to build applications and services that connect to financial institutions.

Banks and financial institutions provide APIs that TPPs can use to access financial data, with customer consent, ensuring a seamless and secure integration. TTPs can then use this data to offer financial services such as budgeting, cash management, and more.  

Key components of open banking

There are a few key components that work together to make open banking possible while keeping financial data secure. These include:  

• APIs: APIs are the backbone of open banking, enabling secure and standardized data sharing between banks and TPPs. Open banking APIs facilitate a seamless flow of information, which is necessary for the development of products and services that rely on financial data transfer.  

• Customer consent and data control: Because open banking leverages sensitive financial data, it’s crucial to prioritize customer consent and control over how this data is shared and used. Applications that use open banking ask for this consent and allow customers to decide which TPPs can access their banking information, ensuring transparency and trust.

• Regulatory frameworks: Open banking is often driven by regulatory mandates aimed at increasing competition and innovation in the financial sector. Notable examples include:
  • The European Union's Revised Payment Services Directive (PSD3), which supports innovation in retail payments, seeks to level the playing field for payment service providers, and aims to enhance the security of payments and protect consumer data.
  • The UK's Open Banking Roadmap, published by the Competition and Markets Authority (CMA), which mandates that the UK’s largest banks implement common standards for open banking and lays out next steps including monitoring, regulatory oversight, resourcing, sustainability, and more.  
• ‍TPPs: These are fintech companies, accounting software companies, and other entities that use open banking APIs to offer innovative financial services, such as account aggregation, payment initiation, and personalized financial management tools.

How did we connect financial data before open banking?

Before the development of open banking standards, the only way to connect banks to enterprise resource planning (ERP) systems like NetSuite to import financial data was to use file parsers and screen scrapes.

File parsers read and interpret data files, such as CSV or XML files, generated by banks. Businesses had to manually download and upload these files into the ERP system. Screen scraping involves extracting data from the bank's website by simulating user interaction and capturing the displayed information.  

Both methods are labor-intensive and require significant manual intervention. These processes have major limitations and create challenges for businesses, including:  

• Inefficiency: These outdated manual processes are time-consuming and prone to errors. The need for human intervention leaves room for mistakes during data extraction and import, meaning the final product can be inaccurate. Even if you use automated scripts, any changes in the bank's file formats or website layout could disrupt these, so it requires constant maintenance and updates to keep the system functioning properly.

• Security risks: The manual exchange of data files and the use of screen scraping poses significant security risks. Sensitive financial information could be exposed during the transfer process, making it vulnerable to unauthorized access and data breaches. Additionally, screen scraping often requires storing user credentials, which introduces further security vulnerabilities.  

Many TPPs still use these outdated methods, either because they haven’t modernized their processes or because some banks don't support open banking yet. The most progressive TPPs are paving the way for more seamless bank connections by adopting open banking.  

Benefits of open banking

Open banking offers many advantages for businesses as well as customers looking for financial solutions. Let’s look at a few reasons why it's a game-changer for the financial industry.  

For customers:

• Increased competition: By opening the financial ecosystem to TPPs, open banking allows agile fintech startups to compete with traditional banks, driving innovation in the financial sector.

• Enhanced customer experience: Open banking allows for the development of more personalized and efficient financial services. Customers can benefit from tailored financial advice, budgeting tools, and streamlined payment processes.

• Increased access to financial services: Open banking can democratize access to financial services through the development of affordable and accessible solutions that can reach underserved populations.

• User data protection: Measures such as multi-factor authentication, encryption, and continuous monitoring help to safeguard sensitive information, ensuring that customers' personal and financial data remains confidential and secure.

For businesses:

• Improved efficiency: Access to real-time financial data allows businesses to automate processes like bank reconciliations. This streamlining of operations not only enhances productivity, but it also minimizes the risk of human error, leading to more accurate cash management and decision-making.

• Enhanced security: Secure APIs provide a protected channel for data exchange between software systems. This ensures that sensitive financial information is encrypted and shielded from unauthorized access during transmission. Businesses can confidently integrate various platforms and tools knowing their data is secure.

• Regulatory compliance: Adhering to regulatory standards, such as PSD3, mitigates the risk of non-compliance penalties and creates trust among customers and partners.  

Open banking regulations around the world

Open banking is gaining traction globally, with new laws and regulations shaping the fintech landscape.  

Open banking was implemented in Australia in July 2020. This means that Australia’s bank customers can opt in to share their financial data with accredited TPPs, enabling them to shop for the best price for banking products or keep track of their banking activities in one platform. The EU is moving in that direction as well with the adoption of PSD3.  

In the US, the Consumer Financial Protection Bureau (CFPB) proposed a rule in October 2023 that would accelerate the shift toward open banking by forbidding financial institutions from hoarding customer data. The rule would also require financial institutions to share this data, at the customer’s request, with TPPs offering competitive financial products or services. The proposed rule is set to be finalized in the fall of 2024.  

As regulations evolve, businesses must familiarize themselves with and comply with the relevant regulations in the countries where they operate.  

Simplify bank reconciliations with open banking

Now that we’ve explored the basics of open banking, you may be wondering how it relates to your day to day as an accountant.

One of the standout benefits of open banking is that connecting your bank to an ERP like NetSuite can streamline bank reconciliations by leveraging:  

• Real-time data access: Automatic updates from your connected financial institution ensure your data in NetSuite is always current.

• Automation: Open banking eliminates the need for manual methods like file parsers and screen scrapes, allowing you to automate the reconciliation process. This saves time and reduces the risk of manual errors.  

• Embedded solutions: NetSuite-native solution NetCash is on the forefront of open banking, offering the most secure way to bring your bank information into NetSuite.

Implement open banking with NetCash  

Transitioning from traditional file transfer methods to open banking APIs can enhance the reliability, accuracy, and efficiency of your NetSuite processes.

Implementing API connections doesn’t have to be complex. NetCash simplifies the process so you can connect your bank and enjoy:

• A unified and accurate view of your cash position within connected banks, all within NetSuite.

• Tools to create transactions, connect bank activity to general ledger activity, and automate recurring transactions or transfers.

• Straightforward, audit-ready reports, like proof of cash and ending balance reconciliation.  

Ready to learn more about NetCash and how it can simplify cash management? Request a personalized demo.  

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