On a first reading, Open Banking and blockchain refer to two very distinct technologies. When one refers to classic finance, blockchain for its part echoes cryptographic payment infrastructures.
However, both ultimately have the same objective, which is the democratization of financial services. The last two decades have been particularly prolific for the two technologies which have developed in parallel with each other.
We can even say that there is a sort of race between the two areas. Each trying to improve access to finance as best as possible.
However, we can increasingly see ideas from both technologies crossing over. In fact, it even appears that the two technologies can advance each other.
What is Open Banking?
Open Banking is a protocol that shook the banking industry in the early 2000s. In the term "Open Banking", there is the word "open". So, the main idea is that customers can share their financial data with regulated trusted third parties via what are called APIs. The acronym API means "Application Programming Interface" in French. Thus, APIs are mainly developed by banks or Fintechs.
Before the advent of Open Banking, this type of information was exclusively reserved for banks. It was therefore information that was “closed” by the banks and by the banks only.
What are the concrete applications of Open Banking?
Among the services offered, we can cite financial management applications, those which allow you to manage your personal finances for example. In this type of apps, users can view their bank accounts from different banks in one place. They can then have a simple view of their expenses and all transactions made.
Open banking also sometimes uses Artificial Intelligence and different algorithms to make financial management more efficient. New services were then able to emerge, such as loan applications for example.
Thus, open banking provides new use cases thanks to APIs and frees financial services from their banking shackles.
What does open banking bring to users?
The first major advantage of Open Banking is certainly the fact that access to information is facilitated. We also have real-time access to different transactions. The functionalities are then multiplied while giving more freedom to the users themselves.
Thus, users have more options and now navigate in an open ecosystem where they control their information.
You should know that initially, not all banks were receptive to this protocol. Banks feared problems with computer hacking in particular. Then, the other reason is the loss of potential customers. Many fintech entrepreneurs have been unable to access APIs, for example.
Can crypto and open banking work together?
As of April 2021, Bitcoin's market capitalization has reached over 1000 trillion USD. Financial institutions around the world then realized the importance that bitcoin and cryptocurrencies were gaining.
Of course, and the latest scandals that have occurred in the cryptocurrency industry (see the dizzying fall of Sam Bankman Fried), there is still a long way to go for mass adoption.
It is in this particular context that open banking and cryptos can join forces to make finance a fairer and more democratic space.
In fact, open banking and cryptocurrencies already work together and this is particularly true for centralized applications or platforms that use traditional bank card payments.
What are the benefits for crypto of using Open Banking?
So, today, when using a crypto application, it is possible to buy cryptocurrencies via a traditional bank card. So, with open banking, it facilitates transactions in a transparent manner.
This makes the whole process simpler. Here are the advantages that make crypto platforms use open banking:
- Information is not shared because one-time access codes and a specific API are required.
- Users can log in through their banking apps for easy authentication.
- It is then possible to track the source of incoming and outgoing funds. This makes the job easier for regulators.
It can also be mentioned that applications of automated trading as Bitsgap can work perfectly. Bitsgap for example uses APIs to connect to exchange platforms and then run trading bots.
Due to its advantages, many applications use both technologies. We can cite for example the Plum app or, Bitpanda which allow you to invest in classic stock market assets and in cryptocurrencies.
Is there a war between Open Banking and Cryptos?
Some critics of cryptocurrencies believe that Open Banking could be enough to modernize traditional finance. On the other hand (on the side of supporters of cryptocurrencies), Open Banking can be a real obstacle to the financial emancipation of individuals…
In reality, cryptocurrency could, in another configuration, have managed to establish itself in current transactions. This is - until today - the ultimate goal of the use of cryptocurrencies: to become a means of payment widely used in online and physical stores.
We are certainly on the right track because today, we can pay web hosts in bitcoin, buy gift cards, pay beers, buy houses (cf. RealT) and even make travel with cryptocurrencies. However, even if we can paying for more and more things in cryptocurrencies, this still remains in the minority.
->Read “What can you buy with bitcoins”?
The main reason for this "delay" is that at the time when Bitcoin was favored for everyday payments, network fees exploded... It was then in certain circumstances more expensive to pay the fees than the item in question... This is the famous bitcoin scalability problem which certainly delayed payment in bitcoin…Note that since then, layer2 solutions have emerged such as the lightning network and which allow transactions to be carried out instantly and almost without fees.
-> See the 5 best Lightning Network wallets for using bitcoin
What are the advantages of cryptocurrency over Open Banking?
Many users are convinced that cryptocurrencies have more advantages than Open Banking. This is particularly true for emerging countries which do not yet have a robust financial infrastructure.
Thus, cryptocurrencies have the advantages of being:
- Without boundaries of use. Open Banking cannot circumvent limitations or even restrictions imposed by states. Cryptocurrencies can be used anywhere in the world and by all citizens without any geographic or nationality restrictions.
- 100% ownership of your assets: Holders of cryptocurrencies have complete control over their assets. We cannot freeze their wallets or even limit access. Remember that this is the case for those who use non-custodial wallets.
- cryptocurrencies offer absolute transparency. Even if Open Banking makes it possible to trace the operations carried out, with cryptocurrencies, access is absolute to all people. Anyone can consult the register of operations carried out. This then offers absolute transparency on the transfers made.
Final word on the interaction between Open Banking and Crypto
The future looks bright for open banking apps. Likewise, crypto applications also have a bright future. However, the war between the two systems could become ever fiercer. For example, the rise of open banking will also highlight the use of FIAT…to the detriment of cryptocurrencies…
In this sense, open banking is certainly the real competitor to crypto applications. The latter must then be patient and offer ever more innovative services. Also, it seems that their union could also lead to fantastic use cases.
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