What Is Open Banking & Why Does It Matter?

What is Open Banking?

Open banking, in a nutshell, is a series of laws and regulations that requires the UK’s 9 biggest banks to publicly release all of their financial and transactional data in a standardized format. The Competition Markets Authority(CMA) has driven these changes to fit alongside the same new European regulation called the ‘Payment services Directive 2 (PSD2)’.

The goal of open banking is to provide a secure format by which authorized organization can share and compare data. Open banking allows third parties access to bank data to let them provide services and to customers.

This all sounds well and good, but what does open banking mean for you? At its core, it means more choice in how you handle your finances.

In other words, open banking proposes a new banking experience that gives the average person accurate financial data on banks so they can better compare business and services from financial service providers.

It’s not entirely sunshine and rainbows for everyone, though (more on the disadvantages of open banking later).

How Open Banking Works

Open banking is all about getting the most value out of your bank.

Banks hold a complete record of all financial transactions, transactions for things like utility payments, mortgages, and train tickets. For the most part, banks do not really do anything with this information. Open banking lets them share that info with third parties, but only once you have given them permission to.

Open banking requires banks to share customer information about their transactions with authorized third parties. In doing so, businesses can better tailor offers to peoples’ particular financial situations.

For example, you could link your banking information to an app that takes account of your spending and recommends a new credit card or savings accounts that’s right for you.

Or you could have multiple bank accounts linked to the same app to handle your finances all from the same place. Pretty convenient, right?

The main point of open banking is to provide more efficiency, and flexibility when it comes to financial services. There is also the argument that open banking offers higher transparency, though this would only be true so long as banks and apps exercise proper data encryption and protection.

Open Banking Use-Cases: What Are the Benefits?

Open banking is a big game-changer for banks and financial companies. For the consumer, open banking gives more ways to handle your money, payments, and loans.

  • More tools, better interoperability: With the introduction of open APIs, you can expect to see more personal financial management apps (PFMs) thanks to open banking. Open APIs provide a standard digital interface so that third-parties can access data efficiently and securely.
  • Better services: Open banking allows third parties to suggest services and products that are specifically tailored to your financial situation. This makes things like lending and borrowing much easier. Let’s say you wanted to take out a loan — Instead of searching for banks individually and gathering information by hand to submit to a lender, lenders would have streamlined access to your info, like your credit history.

Some open banking apps could provide overdraft protection. If the app notices you overdrafted an account it can send you a warning and, with your permission, automatically transfer funds from another account.

  • More payment options: As part of the European Commission’s Second Payment Services Directive (PSD2), third parties are allowed to initiate financial transactions from your bank. Open banking forges new ways to make and receive payments. Several people are already used to using third-party payment apps (PayPal and Venmo come to mind) but the new laws make it easier for providers to handle payment options.
  • Easier accounting: Bookkeeping and accounting could also become less expensive. Apps can have access to all your accounting info in one place and automatically update your books when you make transactions, making prepare your taxes much easier.
  • Reduced fraud: Open banking lets third parties look at financial transaction records. By crowdsourcing information and using AI, they can better detect patterns of fraudulent purchases or highlight ways to decrease your monthly spending.
  • Competition and innovation: Ideally, open banking will stimulate competition by giving smaller business and startups better information so they can leverage services and products to consumers. In a best-case scenario, these market pressures may make banks upgrade the quality of their services. While we are not sure yet how exactly open banking will change the financial landscape in the long term, there is a great potential for innovation, which ultimately comes out in the consumer benefit.

What Are the Problems With Open Banking?

Not everyone is excited about the changes surrounding open banking. Most notably, traditional big banks have the most to lose from open banking. Many bank customers are happy to share their financial information with third-parties to leverage better services, which may mean bad news for traditional banks who do not tailor their services to respond accordingly.

But as good as it may sound, open banking does not come without risks to the consumer. Because open banking is so focused on software and digital application, there is always the risk of hackers compromising financial data. While preventing identity theft and fraud protection are important components of third-party APIs, no software is 100% safe. Fortunately, according to the new regulations, as long as you are sharing your data with authorized third parties, you are protected from incidents of fraud.

How Do Providers Access Data?

There are two main ways third parties gain access to data once after you have provided permission:

  1. Application Programming Interfaces (APIs)
  2. Screen Scraping (aka Direct Access)

APIs are a very common part of the web. APIs allow the sharing of people’s information, preferences, location. It means the likes of Facebook, Google and Uber can deliver a localised and personalised service. The same way you use Google maps in UBER. Open banking has outlined the process for third parties to follow and there is plenty of security measures in place to keep data locked up.

Screen scraping is what most of the existing apps on the market are using. Providers have ‘read-only’ access to your online banking, and you are essentially trusting the 3rd party by sharing the login process with them. Providers will only be able to use screen scraping until September 2019 by which time we expect it to be banned (this has caused quite a stir amongst the IT squads). APIs are expected to take over.

How Safe Is Open Banking?

Check If an Open Banking Provider Is Authorized

Before using any third-party make sure they are authorized open bank providers. Authorised providers have fraud protection so you will be protected in the case of any mismanagement of data. You can see a list of authorised providers on the FCA register or Open Banking Directory. If you are happy with a provider and their security measures seem watertight, you can provide access.

What Happens If You Use an Unauthorised Open Banking Provider?

Using an unauthorised provider means that you may not be protected in the case of fraud or identity theft. So, if you use an unauthorised provider and get hit, your bank may not pay out. That is why it is important to make sure the open banking provider you want to use is authorized and has agreements in place to protect you from fraud.

Of course, these rules are still new. Many companies in the UK looking to explore open banking are in the process of becoming authorised and some don’t have to be authorized until the end of 2019. If you are currently using a provider and they are not authorised, you can continue using it with the same level of risk, just know that you may not get protection until the provider is authorized.

If you are not sure if your provider is authorised, contact them for information.

Is My Data Safe With Open Banking?

Like we said earlier, no software or digital application is 100% safe. That being said, authorised providers have many checks and balances on which info they can access.

First and most important, sharing your info is voluntary. Third parties can only access information that you give explicit permission for them to access.

Additionally, authorised providers can only access information relevant to the services you have with them. So an app whose purpose is to track spending from your checking account should not be able to get info on any credit cards linked to that account unless you give it permission.

All providers were also required to comply with GDPR data protection rules as of May 2018. These rules are meant to prevent fraudulent providers from taking advantage of consumers.

Can You Opt Out of Open Banking?

Let’s be clear here: You do NOT have to share your data if you do not want to. That is, yes, you can opt-out of open banking if you want. The rules require banks to share data, but only if you give the go-ahead to do so. More importantly, you are allowed to revoke your permission at any time.

So every provider should be asking you for explicit permission to look at information relevant to their services or products. So you do not have to change a thing about your banking if you do not want to.

The Future of Open Banking

History of Open Banking

Open banking grew out of a law called the second Payment Services Directive (PSD2), a piece of EU passed legislation focused on legislating and regulating European payment providers. The goal of PSD2 was to increase European participation in the payments industry.

Open banking can be seen as the UK-specific version of PSD2. PSD2 made it so European banks had to make their data accessible to third-parties; open banking makes them do so in a standard format.

Open banking in the UK was first introduced in January 2018 by the Financial Conduct Authority (FCA) and the Competition and Markets Authority (CMA) and is meant to transition UK payment providers to PSD2 compliance.

Historically, the UK banking scene has been dominated by a handful of large institutions—HSBC, Barclays, RBS, Santander, Bank of Ireland, Allied Irish Bank, Danske, Lloyds and Nationwide being the largest.

Open banking was introduced as a way to loosen the grip these old institutions have on financial markets and open the way for new innovation in the financial services and technology sector.

The new regulations rolled out in early 2018 set a time period for new providers to apply for FCA authorization to access the new APIs. On April 17, the rollout period came to an end and authorized third-parties could start providing services directly to customers.

Future of Open Banking

It is hard to say exactly how open banking will change the financial sector.

As of December 2018, there were 67 firms using open banking and in July 2018 the service saw 3 million users, a 1 million increase from the previous month of June.

So it is fair to say that open banking is beginning to catch on, even if its growth is not as large as initially projected. The main stumbling block to open banking is a lack of information.

A YouGov poll from August 2018 showed that about 72% of UK adults had never even heard of open banking.

As with any large scale change in an industry, open banking shows a lot of potential for growth and innovation.

It is often very hard to predict exactly how these growths will occur. After all, who would have thought Uber would grow from Google putting out their maps data? Suffice to say, opening up the banking industry to more third-parties is likely to be good news for both businesses and consumers. The main thing that will determine how successful the service will be is if people make a change and start using it.

Is Open Banking Right For You?

So should you get open banking?

It is completely up to you. There is no penalty if you do not make the switch, so you can continue banking how you want with no negative consequences.

However, open banking is an exciting new paradigm in the UK banking industry that has the potential to do a lot of good for businesses and consumers.

If you’re someone who:

  • Enjoys the innovation that digital can bring,
  • You’re happy sharing your data,
  • You think it is about time banks moved closer to people

…then open banking could be a great fit for you. It could prove to be a revolution of money management. But what are your personal thoughts? Are you for or against open banking? Let us know in the comments below and let’s start a conversation.

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