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Guide to Open Banking

In today's information age, the way financial services data is handled seems to be swimming against the tide. While any number of industries have been keen to gather, share and use data to help build better services, financial services' information has remained largely locked down.

Given the sensitivity of financial data, it's perhaps no surprise that banks and other providers have traditionally kept customers' data as discrete islands, ringfenced and closed off from other companies. But that situation is starting to change, thanks to Open Banking.

While the concept of Open Banking has been around for several years, it officially got its start in the UK in 2018, with the help of changes spearheaded by the Competition and Markets Authority. The aim of Open Banking is to unlock what customers can do with their banking information, and so inspire a new generation of innovative financials services from both established players and start-ups, increasing competition and choice in the market.

Open Banking has sounded a death knell for the old, locked-down approach to banking data by enabling customers to share their financial information with whoever they choose (with some caveats, of course). Thanks to the introduction of Open Banking, customers can share their day-to-day income and outgoings with budgeting apps, make information about how they use credit cards available to price comparison sites, or just see all their account details in one place.

Thanks to the Open Banking initiative, as well as the EU's second Payments Services Directive, also known as PSD2, the largest UK-regulated financial services institutions now have to make customers' account data securely accessible to third parties, using a set of agreed APIs.

For now, the Open Banking regulations only extend to information about current accounts, but with time, other types of financial products, such as savings accounts and credit cards, will also be included. Data that can be shared under Open Banking includes information about direct debits and standing orders, transactions, and balances associated with an account, as well as practical details about the account itself, such as interest rate and any fees.

While Open Banking is still relatively new, its proponents believe it should ultimately see the launch of new services that help small businesses and consumers make the most of their money.

For example, managing cash flow and late payments is a perennial bugbear for small businesses; thanks to Open Banking, cash flow management tools and banking apps could eventually be able to identify and chase late payments, adjust outgoing payments, and help businesses identify the most suitable or least costly sources of funding for any temporary holes in cash flow.

Sharing data with Open Banking-approved budgeting apps could do a similar job for individual customers, allowing them to track their spending, find ways to improve their financial health, and spot when to move overdrafts or savings accounts to keep on top of the best rates.

Equally, sharing data with third parties could help customers get a better deal in other areas of their financial life: insurance, mortgages or loans, for example – as the companies that provide such services can get a fuller picture of their customers, and so offer more personalised deals.

The biggest UK-regulated banks are already onboard with Open Banking, and a handful are working on products designed to take advantage of new functionality. The first wave of Open Banking launches from the main providers will be services to let customers see all their financial details in one place. Barclays, for example, allows customers to see details of their current accounts from Barclays and seven other banks in the Barclays app, while HSBC offers a similar account aggregator called Connected Money.

Unsurprisingly, users' main concern with sharing financial data under Open Banking is likely to be security: consumers would be forgiven for being wary of distributing information on their day-to-day spending habits with third parties.

Security is at the forefront of how Open Banking-led data sharing is handled and, understandably, security has been designed into the system. At the most basic level, any sharing can only be done at the express request of the end user, who has to authorise the information access, while those who have opted in can opt out again whenever they want to.

Any companies that want to take part in the official Open Banking ecosystem also have to be sign up with the Financial Conduct Authority (FCA) and be authorised by the watchdog as either a payments initiation services provider or an account information service provider. The FCA has a register of all authorised companies, which consumers and businesses can check to make sure they're only dealing with legitimate organisations.

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Guide to Open Banking
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