How can open banking be applied in blockchain?
Open banking enforces banks and creditors to share customer information allowing them to provide customers with personalized services that fit their needs and financial conditions. Through the use of Blockchain it is possible to do so maintaining transparency, privacy, integrity, and security.
Open banking enforces banks and creditors to share customer information allowing them to provide their customers with personalized services that fit their needs and financial conditions. The banks do not own your data; every person owns their data. A customer has every right to share their information to get a better experience, bringing more competition to the table.
A decentralized ledger holds records with user/owner permission handling. The blockchain aspects of transparency, privacy, integrity, and security fit perfectly in the open banking space. Let’s take a look at each of them:
- Transparency – Data visibility is controlled using cryptography. All the transactions are visible to the participants in the network to a certain degree.
- Privacy – The actual data can be openly visible in the chain, but it is also possible to obscure it with cryptography, guaranteeing privacy. Hashing the data and storing the hash at some point in time provides proof that that data was actually produced at that period of time.
- Integrity – Hashing the data and including it in a timestamped block, you provide evidence that that data was actually produced at that time, providing data integrity.
- Security – Cryptography provides a secure environment for data transparency, privacy, and integrity. Only the signature of the original owner of the assets in the blockchain allows data to be manipulated.
Blockchain and Open Banking
The four aspects of Blockchain define what open banking should be. In a world where it is the law to share information with third parties in a secure and transparent way, applying blockchain as a platform to do so makes sense. In the current scenario, each financial institution has its own internal system where customer’s information is stored. Since open banking requires to open API’s for other F.I.’s for consultancy of that customer’s information, it only makes sense for it to be in a decentralized and shared platform. Figure #1 shows the current scenario on how open banking will work. Each authorized financial institution is going to have to create an API for other F.I.’s to access customers’ information when requested. This will create costly and bureaucratic processes for the participants. It also means that for an F.I. to retrieve the information, it will have to request it from multiple places.
Figure #2 shows how it could work, minimizing operational costs for all the participants and enhancing central banks’ control and regulations, as well as more efficient updates when needed.
It demonstrates open banking using blockchain. A decentralized platform where API’s are universal. The central bank will be able to supervise financial institutions to their regulatory means. Smart contracts will guarantee they follow protocol. The customer will also benefit by controlling their own data, approving information to be shared and accessed with F.I.’s that request access for personalized and better services. In this model, the customer is in full control of all of his data in an efficient way, having the ability to grant and revoke access at any time.
We can conclude that unifying financial institutions, regulators, creditors and governmental entities in a blockchain network brings an easier management scope for the central bank to regulate. The centralization power of information along with privacy, security, permission access, and transparency provides financial services with more credibility and integrity. It also provides an easier way to track and update financial services offered by financial institutions, diminishing fraud-related activity. Customers have more financial power, allowing them to choose to share or revoke information access, bringing more fair competition to the table.