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Open banking: Everything you need to know

What is open banking?

A term used to describe the process of banks and other financial institutions opening up data for anyone to access, use and share.

Don’t worry - it’s not as unsafe as that description might make it sound. Banks are effectively putting in place the infrastructure for their customers’ data to be shared more easily with third parties, when the customer chooses to do so.

That last part is important. Open banking isn’t some ploy to allow banks to more easily sell their customers’ data. The intention is quite the opposite - open banking was conceived for the ultimate purpose of improving financial services for customers. And by opening up access to data they’ve historically kept in-house, it allows new companies and new products to come to market, and use this data in helpful, innovative ways.

So what does it all mean?

  • For financial service providers - At the top of the chain, open banking will allow financial service providers to significantly innovate on their product offerings to businesses.

  • For businesses (large and small) - Those innovations made by financial service providers will mean more effective and efficient financial tools in your business - notably payments. Which will mean things like more automation, freeing up more time, doing away with the headaches of manual tasks, and ultimately saving you money.

  • For customers - Open banking will mean better ways to spend, borrow, and invest.

Open Banking vs. open banking - what’s the difference?

The capitalised “Open Banking” is the UK term, whereas the non-capitalised “open banking” is the generic, global term.

The concept of open banking exists in many countries around the world, in different stages of progress. It’s worth noting that open banking tends to operate at a country level - there is no shared, global open banking initiative.

In countries other than the UK, open banking may have its own specific, in-country term.

What problems is open banking solving?

There’s no one, specific, major problem open banking is solving. Instead, in the simplest terms, open banking is trying to spark competition and innovation in the financial services sector, to create better products and experiences for businesses and consumers.

Some broad problems that open banking can help solve include:

  • Poor trust in banks (see image below)

  • Customers of traditional banks being stuck with outdated products, services, and features (unlike customers of challenger banks such as Tide, Monzo, and Starling - which have the benefit of launching in a more modern time)

(Above: Financial services is the least trusted industry sector, according to the Edelman Trust Barometer 2020.)

Some opportunities that open banking strives for include:

  • Helping people to better transact, save, borrow, lend and invest their money

  • Reduce overdraft fees

  • Improve customer service

  • Increase your control of your financial data

What data does open banking help “open up”?

There are three broad areas open banking is “opening up” - account data, product data, and payment initiation.

Account data

Account data is what you’d expect. Things like:

  • Account holder’s name

  • Account type

  • Currency

  • Date the account was opened

  • Transaction info (e.g. amounts, merchants, etc.)

Product data

Product data is around the products and services a financial institution might offer. For example, historically you would have to go into a bank branch to find out what they can offer you as a customer. Now you can give them a call, or better yet browse their website.

But with open banking this info is put into a standard format, which makes it easier for others to show you the best options for you. (Imagine your accounting software automatically telling you when you’re better off switching banks, and showing you exactly which account to go for.)

Payment initiation

Payment initiation is all about making payments from one bank account to another. But instead of having to login to online banking and manually go through the payment process step-by-step, with open banking this process can be initiated by other software, apps, or websites, and sped up - provided the account holder explicitly consents.

How does open banking work?

Technologically-speaking, open banking relies on APIs (application programming interfaces). An API is just a structured way for one program to offer services to another program. Or, put even more simply, it’s just a way of helping software speak to other software.

Think about the data we’ve covered above - account holder’s name, account type, currency, etc.. APIs are effectively the instructions for how a third party can access that data from a bank.

(Fun fact: GoCardless has its own API.)

Once these APIs are agreed by everyone involved in the open banking initiative (e.g. the government, regulators, and banks), it’s up to the banks to build and implement them. Once they have, businesses can start accessing them and building new and innovative products using them. The customers of these businesses - which could be consumers, small businesses, or even enterprise companies - would then ultimately benefit, by using these innovative products.

Open banking use cases

Key examples include:

  • Better payments solutions for businesses - With the payment initiation side of open banking, businesses could use payment products that improve cash flow, lower costs, increase visibility and control, and reduce fraud.

  • Better borrowing terms - If you don’t have much credit history, you could be prevented from getting favourable borrowing terms. But with open banking, your historical bank account data can be accessed by lenders to help better demonstrate your creditworthiness.

  • Better financial management - By accessing your account data, open banking products could analyse all the money coming into and going out of your accounts, helping you better identify problem areas and opportunities (e.g. lower fees, better interest).

  • Account aggregation - Essentially, being able to see all of your accounts in one place. Instead of having to log in to multiple different accounts in your web browser, or switch between multiple apps on your phone.

Open banking in the UK

Overview

In the UK, open banking (branded as Open Banking) is guided by the Open Banking Standard (OBS) - a framework published by the Open Banking Implementation Entity (OBIE, trading as Open Banking Limited).

The OBIE is a company that was established by the Competition and Markets Authority (CMA) to oversee the implementation of the Open Banking Standard. It’s governed by the CMA and funded by the UK’s nine largest banks and building societies: Allied Irish Bank, Bank of Ireland, Barclays, Danske, HSBC, Lloyds Banking Group, Nationwide, RBS Group and Santander.

Open banking in the UK is regulated by the Financial Conduct Authority (FCA).

While all these entities are involved in the design and implementation of open banking in the UK, there are four core parties involved in “using” open banking:

  • Account providers - Such as banks and building societies. Also referred to as Account Servicing Payment Service Providers (ASPSPs). These are the organisations that implement the Open Banking Standard, allowing their customers’ data to be accessed by third parties, when consent is given.

  • Third party providers - Also referred to as Account Information Service Providers (AISPs - for accessing account info) and Payment Initiation Service Providers (PISPs - for making payments). These are the businesses doing the innovating, creating products and services which use the newly-accessible customer data held by banks.

  • Technical service providers (TSPs) - Companies that work with regulated providers to deliver open banking products or services. Essentially, TSPs collaborate with account providers and third party providers to help deliver open banking products and services.

  • Consumers - Both individuals and businesses. They ultimately benefit from the open banking products and services developed by third party providers.

Timeline

  • Jul 2013 - The European Commission publishes a proposal for a revised PSD2. The recommendation is that account providers (e.g. banks) allow third parties to access account data and initiate payments, when they have consent - the foundation of open banking.

  • Sep 2014 - The Open Data Institute and Fingleton Associates publish a report, recommending that banks create standardised APIs to allow third parties access.

  • Jan 2016 - The final PSD2 text is published in the Official Journal of the EU. EU member states are required to apply the majority of provisions within 2 years.

  • Feb 2016 - Initial set of open banking guidelines published by HM Treasury, indicating how Open Banking data should be created, shared, and used.

  • Aug 2016 - The CMA publishes a report on its investigation into the UK’s retail banking market.

  • Sep 2016 - The Open Banking Implementation Entity is formed.

  • Mar 2017 - Open Data launches, which makes product info, branch locations and opening times, and ATM locations available.

  • Jul 2017 - Specifications are issued for account information and transaction and payment initiation.

  • Oct 2017 - Open Banking Directory enrolment launches for regulated participants.

  • Jan 2018 - The PSD2 deadline arrives for EU member states. All payment service providers must allow third parties open access to customer account data and payment services. Applies to all payments where one provider is in the EEA.

  • Jan 2018 - In the UK, the CMA 9 deadline arrives. The nine largest UK current account providers must provide an open API for current accounts. The Open Banking Standard launches.

  • Mar 2018 - Version 2 of the Open Banking Standards is released.

  • Sep 2018 - Version 3 of the Open Banking Standards (including Customer Experience Guidelines) is released.

  • Sep 2019 - The PSD2 RTS deadline arrives, prohibiting access of data beyond that which has been explicitly authorised by a customer. Screen scraping techniques are also to be banned, and strong customer authentication is required for electronic payments.

How safe is open banking in the UK?

Like all good financial technologies, open banking is designed to be very secure. It’s implemented by banks, so is subject to their rigorous security measures.

The consumer is always in charge of who is granted access to their data, and this access can always be revoked if they wish.

And if fraudulent payments are made, your bank or building society will pay your money back under appropriate circumstances.

In addition, open banking products and services are regulated by the FCA (or the European equivalent, if they’re located in the EU), and consumers are also protected by data protection laws and the Financial Ombudsman Service.

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GoCardless (company registration number 07495895) is authorised by the Financial Conduct Authority under the Payment Services Regulations 2017, registration number 597190, for the provision of payment services. GoCardless SAS (23-25 Avenue Mac-Mahon, Paris, 75017, France), an affiliate of GoCardless Ltd (company registration number 834 422 180, R.C.S. PARIS), is authorised by the ACPR (French Prudential Supervision and Resolution Authority), Bank Code (CIB) 17118, for the provision of payment services.