Everything You Need to Know About Open Banking

open banking

Open banking is the term used to describe a series of reforms that made it safe and secure for customers to share bank details with regulated third parties. This has revolutionised the financial sector, opening up the field for third party apps and online banks to offer a huge range of money management services to customers. However, while open banking is one of the most significant innovations in finance for many years, many customers are still unsure of what the term refers to and what it means for them.

What Is Open Banking?

Open banking regulations have been created to give consumers and small businesses more options for banking online and managing their money. Before open banking reformed financial data sharing restrictions, consumers were restricted to services provided by their own bank only.

The reforms, which came into force in January 2018, mean that banks regulated in the UK must give customers the option to share their financial data with other authorised third-party providers of financial management tools and banks. This financial data includes information on consumer spending habits, regular payments and standing orders, as well as financial services companies used by the consumer.

The purpose of the changes is to encourage competition and innovation in the financial sector, pushing companies to offer improved services and products which will benefit consumers and small businesses and promote good money management.

Where Did Open Banking Come From?

Before the open banking reforms in 2018, the UK government had already been kicking around ideas on reforming the UK banking sector for some time. The government’s concern was that established banks in the UK held a monopoly over the financial services sector, which meant that there was no way for new financial service providers to offer new products and services and thus very little competition in the market.

An investigation was initiated, which looked into the supply of retail banking services to personal current account customers and SMEs in the UK. The investigation concluded that there was a need to improve competition in retail banking and financial services. One of the changes proposed to improve competition and choice in the industry was open banking, a revolutionary new way for banks to operate.

What Does Open Banking Mean for Consumers?

To fully understand what open banking is and how great its impact could be, it’s important to know what open banking can be used for. Open banking means that consumers can share their data with third-party providers of apps to help analyse spending, manage savings and borrowing accounts, and other budgeting tools.

Some apps allow consumers to plug in the details of all of their bank accounts to be managed from one central hub. In addition, these apps may offer other personal finance management tools, including spending analysis and overdraft alerts. Business owners can also use third party open banking apps that offer tools to help manage business accounts, cash flow, and efficient borrowing.

Without the new open banking regulations, none of these services would be possible.

What Is the Impact of Open Banking?

Open banking is set to hugely impact the financial services sector over the coming years for several reasons. First, the reforms have opened up the playing field and made it possible for new start-ups to compete alongside established banking giants in a way never seen before.

– Open banking puts pressure on banks to improve their own products and offer better financial services to prevent customers from sharing their data with third-party providers and looking for these services elsewhere. As soon as a few banks start offering these services themselves, the rest will follow suit.

– Consumers can expect to see improved money management tools on offer over the coming years as third party developers are now free to specialise in budgeting apps and tools without offering banking alongside them. The fintech sector has already come on leaps and bounds in the past few years, and open banking will only hasten progress.

– Small businesses and consumers hoping to draw credit or take out a loan don’t need to submit outdated financial reports to lenders; instead, lenders can use open banking data sharing allowances to pull the data they need from banks and assess it directly once they’ve got the account holder’s permission.

– Integrated accounting systems can be used to make accounting more economical and more efficient, automatically updating when payments are sent and received from different accounts and making tax prep for small businesses smoother.

– Open banking, and specifically the European Commission’s Second Payment Services Directive (PSD2), makes it possible to pay via third parties, which means additional service providers are popping up and increasing the number of payment options out there for consumers and businesses. Companies like Venmo, PayPal, Skrill, and Neteller have already demonstrated how useful third party payment services are.

How Does Open Banking Work?

The first thing to know is that open banking isn’t possible without your consent, which means if you think it isn’t for you, that’s fine. Once you give your permission for your data to be shared, third party providers can access your financial information via one of two methods: screen-scraping and APIs.

The first generation of third-party apps used screen-scraping. This method requires users to use the same username and password for the new app as they do with their bank. It effectively granted the app permission to log into consumers’ bank accounts and scan the data for relevant information.

Screen-scraping was impractical. It often failed whenever banks updated their websites and carried obvious security risks because it allowed third-party apps read-only access to user bank accounts and required the use of identical passwords for both accounts.

Since September 2019, all open banking applications now use APIs. APIs allow all kinds of personal information to be shared, including financial details, location, and spending habits. API technology is already used by many online platforms, including Facebook and Google Maps, which means it’s tried and tested technology that most consumers are happy to use.

Who Can I Share My Bank Data With?

One of the most important things to remember about open banking is that it doesn’t mean it’s safe to share your bank data with anyone and everyone. However, open banking regulations should mean it’s safe to share your data with any authorised company, and this means that if something goes wrong, your money is protected.

Authorised parties are regulated in the UK by the Financial Conduct Authority (FCA) or regulated in Europe by another established European regulator. So one thing you should always do before consenting to share your data with a third party is to check that they are on the FCA’s Financial Services register. Authorised providers should also state that they are authorised on their website, alongside their registration number.

Another thing to know is that there are two distinct types of services offered by open banking operators, and providers will need to have different authorisations for each type. These service categories are:

– Account information services, which let you see all of your bank account information in one place. This means multiple accounts held in different banks will all be viewable via a single app, and the app may also offer budgeting tools and product recommendations.

– Payment initiation services, which let you pay companies from your bank account directly rather than using a third-party service such as Visa. Retailers such as Amazon even count as offering this service.

Can I Use an Unauthorised Provider?

If you really want to give an unauthorised provider permission to access your personal data, it’s your right to do so. However, you won’t get the same protection against fraud with an unauthorised provider. This means that if the worst were to happen, you could actually lose a lot of money.

If you want to use a third-party provider that’s not regulated, you should still do your research. Ask the provider why they’re not registered and what security measures they’ve taken to make sure your money is safe. Try to exercise good judgement, and ask lots of questions over the phone to make sure the provider isn’t operating a scam.

It’s worth knowing that some companies that are not actually authorised do still offer protection against fraud. For example, Chip, an AI app that calculates how much money users can save every month without really noticing it, still adhered to e-money regulations and others before it was granted authorisation to ensure that users’ money was kept relatively safe.

Is Open Banking Safe?

Safety is the biggest concern on most consumers’ minds when they take their first steps into open banking. So it’s understandable to be wary of new technology which wants access to information as personal as your bank details. However, provided consumers are careful about who they consent to share their data with, open banking can be perfectly safe.

As long as providers are authorised, they can only access the data they need for the service you’ve signed up for. So if you’re using an app designed to help you make savings in your current account, that app won’t be able to access or see anything about your savings accounts or credit cards because those details aren’t relevant to the service it’s providing.

All authorised open banking providers also have to comply with several regulations, including the GDPR regulation introduced in May 2018. This means that providers have to be transparent about what data they’ll use, how long they’ll have access to it, and what they’ll do with it – before you even sign up.

One valid concern arising from critics of open banking is that by allowing more companies access to your data, you’re opening up more opportunities to fraudsters and increasing your risk of becoming a victim of fraud. Unfortunately, no matter how careful providers are, it’s true that the more companies that have access to your bank data, the higher your risk profile is.

However, the steps these providers are taking is enough to minimise the chance of fraud, which should mitigate the majority of the risk involved. And, provided you allow only authorised providers to access your data, you should be covered even if you do become a victim of fraud. The new rules mean that as long as you’ve shared your details only with authorised third parties, your bank cannot hold you liable for fraud.

Should I Use Open Banking?

Whether or not you want to use open banking after reading all of this is up to you. Open banking will likely become more commonplace in the future, and consumers will gradually feel more comfortable sharing their data with third parties. However, at the moment, there is still a lot of understandable concern surrounding any data sharing, no matter how regulated the industry is.

Some consumers feel that the extra services and products offered by open banking platforms are unnecessary or offer no benefits, and if this is the case, then perhaps open banking isn’t for you. However, open banking platforms can offer countless ways to customise and streamline banking processes for those who do use them, ultimately saving consumers time, money, and stress.

The most important thing to remember, particularly if you’re concerned about security, is only to share your data with authorised third parties. Provided you follow this rule, your money will be safe even in the unlikely event that you become a victim of fraud.