Open Banking Overview

Open Banking is the practice of securely sharing financial data, subject to customer consent. In practice, this means banks and other financial service providers which hold customer data must grant authorised third parties access to this data upon customer consent. Effectively, this takes ownership of financial data away from the bank and puts it back into the hands of customers.

In October 2015, the European Parliament adopted a revised Payment Services Directive, known as PSD2. This was designed in part to spearhead competition and innovation within the financial sector. In particular, the legislation included rules that promoted innovation through open banking. In August 2016, the UK’s Competition and Markets Authority required the nine-biggest UK banks (CMA9) to allow FCA-licensed third parties direct access to customer account data down to the level of individual transactions. This ruling came into force on January 13, 2018, and the UK became the first country in the world to implement open banking.

PSD2, Open Banking and analogous implementations around the world are generally based on financial institutions making their customers’ data available via Open APIs. This means other financial institutions or third parties who have been authorised by a National Competent Authority (NCA) can access this data to provide additional value-add information or payment services that are not provided by the primary institution.

Many use cases have been found for open banking, but a selection of primary applications are as follows:

1. Account aggregation - or, being able to see all of your accounts in one place. Rather than having to switch between multiple apps or web pages, open banking-powered apps now enable you to see aggregated data from all of your accounts in a single app or web page.
2. Fairer access to credit - customers without much credit history tend to receive unfavourable borrowing terms or outright rejection from lenders. With open banking data, current accounts can now be considered in credit scoring which helps you better demonstrate your creditworthiness to lenders.
3. Improved money management - third party providers who can access your transaction data can conduct deep analytics on this data to produce apps that allow you to monitor your cash flows in real-time, receive hints and tips, and analytics such as spending breakdowns by category. This can help promote good financial behaviour and in turn, open up opportunities to receive more favourable terms on financial products such as loans and credit cards.
4. Cheaper payments solutions for businesses - with open banking-facilitated Payment Initiation Services, businesses are making fast, account-to-account payments that cut out the cost of intermediary services such as BACS.

These services, which are provided by third party Account Information Service Providers or Payment Initiation Providers,involve the user (individual or business) interacting with the AISP or PISP’s services which can be a website, mobile app or directly via an open API. Consent must always be given by the customer before any data sharing can take place (this is usually provided within the third-party provider’s customer journey which allows a customer to authenticate their identity with their bank and subsequently authorise the sharing of data). Additionally, customers can revoke access to their data at any time.

Since open banking is regulated by NCAs, open banking is as safe as regular banking. Since banks themselves are involved in the process, they bring with them the weight of their security infrastructure, while third parties have to meet stringent requirements as laid out by the NCA. In the UK for example, the rollout of open banking has proven to be very secure, with products and services heavily regulated by the FCA, with consumers also being protected by data protection laws and the Financial Ombudsman Service. At all stages of the process, the consumer is in charge of what happens to their data: who can access it and when access can be revoked. Since a small amount of fraud is inevitable in any financial service, any losses incurred as a result of such an event in the open banking ecosystem are usually covered by your bank or building society.

In the general literature, you will encounter capitalised and non-capitalised versions of the term “open banking”. The capitalised version (Open Banking) refers to the branded implementation of open banking in the UK. The non-capitalised version (open banking) refers to the generic, global term. In countries other than the UK, open banking may have its own specific, in-country term.