Open Banking - what is it, and why do I care?

Posted on the 26th April 2018 by Hamish Anderson in Founders' blog, Business, Finance

Open Banking

By now you’ve probably heard about open banking. You may have even received a cryptic letter from your bank, asking for permission to do all sorts of things, and are wondering what all the fuss is about.

What is Open Banking?

As Money Mover users and supporters, you’ll probably agree with me that banking has been dominated by a small number of large players for too long.

Open banking seeks to change this by making it easier for to work with other banks and financial institutions, whether it’s to switch accounts or access new products and services.

The point of all this is to encourage innovation and improve competition in the financial sector.

Changing your bank

We generally choose a bank when we first start to receive an income; whether it’s an allowance, a Saturday job or an educational grant. Our choice is based on all sorts of sound financial rationale, such as where your parents bank, or which one is prepared to offer the biggest student overdraft.

 Part of the reason why it’s so much hassle to move banks is that their systems are completely incompatible with each other. While most UK banks have signed up to the Current Account Switching Service, which means it should take just seven working days to move your account from one bank to another, open banking should make this process even quicker and more reliable, as your existing bank will be able to provide your new bank with a comprehensive file of account and transactional data in a common format.

Making payments

Making online payments is currently a bit of an awkward process involving various middlemen. When you buy something from your favourite ecommerce site, or enter into almost any online transaction, the retailer will hand the payment over to an ‘acquirer’ (e.g. PayPal or Sagepay) for processing. The acquirer will route the payment via the card systems (e.g. Visa, Mastercard) and their own banking network, which adds links in the chain and leads to additional costs.

 Open Banking should make this process vastly simpler (and cheaper, at least in theory) as the payment can be settled directly from the customer’s bank account, bypassing the traditional acquiring process. In the case of international payments, Money Mover users may soon be able to instruct their banks to send settlement funds directly to Money Mover on demand, rather than having to carry this out manually.

Managing your money

One of the earliest implementations of open banking is in money management. A common banking interface makes it easy to do a number of things which bring transparency and insight to your financial affairs. It’s now simple to bring multiple accounts from multiple financial institutions together in one place. This provides customers with a single consolidated view of their financial position, across current accounts, loan accounts, mortgages, savings and investments. If you think about how many websites, logins and passwords you’re using, you can see how helpful such a service could be.

 Some early financial management websites did a similar thing, but this was achieved by what’s known as ‘screen scraping’ – the website would hold your account information and passwords, log into each of your accounts masquerading as you, and ‘scrape’ the numerical data from the screen data displayed on the website itself. Screen scraping is now explicitly prohibited by PSD 2 –  the set of EU directives behind Open Banking – and direct connections (known as APIs – application programming interfaces) between the financial app provider and the financial institution makes this process significantly more secure and reliable.

 Furthermore, having access to the transactional data behind the balances means that spending patterns can be analysed and suggestions made to improve behaviour or create savings and efficiencies. Is your account regularly going overdrawn towards the end of the month? Change the date of an end-of-month payment until after your salary hits the account, or transfer some funds from a savings account.

Loans and mortgages

If you choose to allow it, lenders will be able to access data from your current account to support your loan or mortgage application. No more form filling, scanning bank statements or spreadsheets detailing your monthly expenditure; all the information can be extracted directly from your account data. In addition, access to such detailed transactional history could help businesses and individuals which don’t have comprehensive credit data obtain loans. You’ll be able to specify ‘one off’ access to your accounts, so that a loan provider can review transactional data from, say, the last 12 months to inform a lending decision, but

What are the risks?

If you’re already using online banking then Open Banking shouldn’t present additional risks. PSD 2 obliges all providers of Open Banking services to implement “strong customer authentication” (which means not just a user name and password, but an additional factor in the possession of, or exclusive to, the account owner. You’re probably already using a smartphone app or a dedicated authentication device provided by your bank).

 Any process that involves transmission of sensitive data does create an opportunity for fraud, but Open Banking provides some important protections. Firstly, you will never need to share your login details with anyone other than your bank or financial institution holding the data you wish to share (screen-scraping services require that you hand over your account credentials, so this is a definite improvement). Secondly, your bank is obliged to refund you if it makes a payment that you didn’t authorise, even if the payment was initiated by another service. Thirdly, the new General Data Protection Regulations (GDPR) provide strict new protections and remedies if you feel that your data has been accessed and shared inappropriately or without your explicit permission.

When is it all happening?

Open banking is part of the EU’s Second Payment Services Directive (PSD 2), which came into force on the 13th of January 2018. Nothing really changed on the 13th, but it saw the start of what’s referred to as the “managed roll-out” of services. Services based on the new regulations are now starting to appear, but they’re not revolutionary. Other commentators have likened the early days of open banking to the early days of the internet. We know that this is going to be big, and has the potential to enable great things, but we’re not quite sure what they will be yet. No doubt we’ll see additional services, which can do much more exciting things, launch over the next couple of years.

Where can I find out more?

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