What is an open banking architecture?

An open banking architecture is an organizational and technological framework that allows third-party providers (TPPs) to offer external products and services to a bank or credit union's customers.

An open banking architecture is an organizational and technological framework that allows third-party providers (TPPs) to offer external products and services to a bank or credit union's customers. Its goal is to ensure that those customers can satisfy all their financial goals from one location. An open architecture helps ensure that TPPs recommend products best suited for each client, even when those products aren't those of the third party itself.

The architecture of open banking is based on third-party apps that ask bank customers for approval to access their data. Customer consent drives the flow of information, which can be likened to approving a request for location data from an Internet app. The app needs user data for its service, so it prompts the customer to approve the data access, often via a pop-up.

OAuth is an open authorization protocol that is a part of many open banking architectures. It enables bank customers to grant access to their data from third-party providers (TPPs) without giving them their passwords. After authenticating the credentials of the TPP, the bank confirms the user consent and provides the requested information.

Ideally, an open architecture improves the allocation and diversification of the banking customer's assets and provides higher returns as a result of the lower fees produced by third-party competition. It also increases the trust between banking advisers and clients, because the advisers are interested not so much in the clients’ decisions as in keeping them under their roof.

Open architecture has become more common as banking customers have become savvier about the financial interests and products of their advisers. Banking customers generally see the need for a greater range of products and services as their wealth increases. Under this scenario, a single provider is unlikely to meet all the needs of a bank's customers, but multiple third-party providers can.

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