Open banking has opened up new possibilities for financial and technological services, enabling companies to tap into consumer data like never before. For example, third-party service providers can now access bank account information, account balances, customer financial history, and more through bank links and customer consent.
Growth and enhancement through in-depth collaboration
Internet of Things (IoT) could see growth and enhancement through in-depth collaboration with open banking technology to provide additional benefits and uses for people.
Benefits include consumers accessing their financial data such as bank balances through wearable tech and AI assistants, making requested and automated payments through IoT devices, enabling more detailed credit checks, simpler insurance claims, and more.
Data safety and cybersecurity in open banking
When it comes to any new fintech innovation, concerns and skepticism typically arise in consumers in terms of data safety and cybersecurity. Many consumers believe that traditional financial institutions are better equipped to protect their data than fintech.
This is likely due to years of continued use and a lack of profound understanding of what terms such as “open banking” entails and what security measures are in place to protect consumers.
Open banking is as safe as ever and spreading its data security practices and policies across various case studies in the world of IoT.
Current data protection practices in IoT
The rise of IoT and intelligent technologies has led to a consistently improving customer user experience through seamless day-to-day operations that fulfill the users’ needs. However, in terms of security, IoT has previously seen a good amount of criticism regarding built-in security features, and it often relies on the safety of the network the tech connects to.
The data collected, stored, and shared by IoT devices must be protected under the General Data Protection Regulation (GDPR). GDPR refers to a legal framework that regulates the guidelines on how data must be collected and protected.
It is a crucial obligation for IoT application providers to adopt GDPR-compliant data protection and security measures to keep their users’ data safe and protected and ensure that the ingrained sensors do not collect more data than necessary.
IoT tech has the potential to be targeted with malicious intent
Just like any other device which can be connected, IoT tech has the potential to be targeted, tapped into, and utilized with malicious intent. For example, in 2020, a study by Palo Alto Networks found that 98% of all recorded IoT data traffic was not encrypted.
A 2021 global survey by IT security firm Trend Micro found that 86% of IT professionals believed that their organizations could do more to educate regarding IoT security threats.
With predictions estimating over 30 billion established IoT connections by 2025, security must be at the forefront of users’ and organizations’ minds.
Open Banking will protect a specific part of data
While open banking can protect only a specific part of the data gathered by IoT devices with utmost certainty, implementing open banking policies and technologies protects financial and payment-related information first and foremost.
With smart payments, automated purchasing, and direct bank links on the rise, the financials will, without a doubt, become a fundamental aspect of IoT.
How open banking is kept safe
Safety is one of the main pillars of open banking, and despite security concerns, it is as safe as traditional banking.
Open banking API endpoints were actually developed by banks and have been rigorously tested to ensure maximum data security.
Open banking also gives more power to consumers themselves, allowing them to only share data with third parties of their choosing. Eligible banks also have their own security measures in place, delivering a multi-layered safety wall.
Payments Services Directive 2 (PSD2)
Payments Services Directive 2 (PSD2), the regulation behind the creation of open banking, was initiated in part to re-establish security requirements in the payments sector. Strong Customer Authentication (SCA), dynamic linking requirements, and consent management were introduced to ensure that only authorized users can connect to sensitive data.
Consent management is required when banks and other firms ask customers for consent to the entity’s collection and sharing of their personal data.
SCA’s Authentication Process
SCA refers to a process of authentication that requires the account holder to prove their identity through the use of two or more security elements that are split into three categories:
- knowledge (something only the owner knows);
- possessions (something only the owner physically holds); and
- inherence (something relating to attributes unique to the user, such as fingerprints or voice recognition).
Dynamic Linking Codes
Similarly, dynamic linking establishes the user’s identity by requiring a new, unique code for every new transaction.
Unlike questionable practices, such as screen scraping (the process of copying information from a screen rather than securely connecting to the actual platform displayed), open banking never requires users to share their login details with anyone — making the above methods a viable option for identity verification.
How IoT devices benefit from open banking security measures
While IoT devices are all about convenience and consistent data sharing, some sensitive information, such as financial data, should not be easily accessible outside of the agreed-upon scope.
With unauthorized access to devices being one of the main concerns, it is vital that PSD2-backed open banking identity verification processes, such as SCA, be implemented when setting up automated payments and new transactions. This ensures that only the authorized user can establish future payments.
On the downside, it reduces the simplicity, and ease-of-use IoT is so well-loved for. Still, it is necessary to require the same level of security for regular IoT payments as in any other financial app.
Data gathered on the user can be helpful in further protecting the user from fraudulent actions.
By securely connecting to bank accounts, consumer data can be collected and analyzed to create a portfolio that consists of regular spending patterns, most-used shopping categories, and gambling and overspending habits.
This client file can then be used to analyze whether their current transaction is characteristic of their usual spending behavior or not. If the new transaction does not fit the typical customer profile, the system can be notified, and additional checks and identification processes can be performed.
Encryption of Data
While many IoT devices do not encrypt traffic, open banking goes the other way. It does as much as possible to ensure that the APIs are protected by implementing various security measures.
In combination with a heavy-duty identification verification and data analysis, this establishes a protection system that, while IoT tech itself may be vulnerable to some attacks, the financial data and accounts connected to the device are still protected.
This protection ensures fraudulent payments, login attempts, and access to bank data are limited.
IoT and open banking for the future
Protection of customer data is at the core of PSD2 and open banking, enabling the customers to control and maintain their own financial information. Therefore, security is vital when it comes to sensitive financial information, and solid safety measures are an utmost priority.
Open Banking and IoT
Open banking and Internet of Things technology will inevitably go hand in hand in the near future. Where IoT has security concerns, open banking can help provide the answer and the needed safety net to protect users when accessing their finances on the go.
As technologies continue to evolve and prosper, both of these options in open banking will generate more ways to connect and create countless innovations to enhance and improve users’ lives across the globe.
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