What is Open Banking? And what does it mean for us? Open Banking is an initiative for banks to share your financial data with program and app developers in a secure and customer-approved way. Data-sharing in this way encourages competition and innovation among financial services. This means customers like you will have top-quality personalised financial products at their fingertips.
- How Open Banking differs from PSD2
- Which areas of personal finance it will impact
- How far it is operational
- Is it safe to share financial information online
What is the Difference between Open Banking and PSD2?
The broader European legislation, called the ‘Second Payments Services Directive’ (PSD2), opened the door to financial data sharing in early 2018. This put an end to the banks’ monopoly on financial services. At the moment our banks hold a great deal of data on all its customers such as records of spending and borrowing decisions. However, this information remains largely unused.
PSD2 is an initiative to encourage data sharing-only with the account holder’s consent. Not only will this give customers more control over their data, but it will also urge banks and tech start-ups to develop innovative apps and services.
Open Banking is the UK arm of PSD2 and stipulates that all financial institutions must share data in a secure, standardised format. The non-profit organisation Open Banking Ltd. directly runs Open Banking, overseen by the CMA (Competition & Markets Authority). Any concerns about abiding by data protection laws come under the remit of the ICO (Information Commissioner’s Office).
Why is Open Banking Necessary?
Generally, UK customers are extremely loyal to their bank. They open an account to deposit their first pay cheque or student loan instalment and very rarely switch. You might consider that positive as customers can build up a working relationship with their bank, but it also leaves clients open to abuse.
Unfortunately, many loyal customers are hit with costly overdraft fees and have little incentive to put money by in a savings account to earn interest. These unwanted results are partly because of our reluctance to switch banks. The CMA is concerned that our loyalty prevents competition and innovative lenders from entering the market.
Open Banking has the potential to change the entire retail banking sector and the way that we use and manage our money. More specifically, let’s look at three key areas where it will have a significant impact:
How Open Banking will Revolutionise Financial Services
- Money Management
At the moment, rival banks have incompatible operating systems. For example, if you have accounts at two different banks, you have to access them separately to see your financial situation.
However, Open Banking’s standardised formats will allow you to see all accounts from the same app. In the future, new apps would give you a one-glance overview of all your income and expenditure. This will make it far easier for you to manage your money.
- Applications for Loans
Currently, if you wish to borrow from an online lender, you must provide them with detailed information about your finances so they can assess affordability. Subsequently, the underwriting department has to manually re-enter scanned bank statements, making it a tedious process.
In contrast, Open Banking’s data-sharing would streamline this process and give you the power to grant them access to all your financial transactions for the past year. Furthermore, this would be particularly helpful for customers with ‘thin files’ (those who have little/no employment/earning history) who may want to apply for bad-credit loans.
Safely sharing this data instantly bulks up their files with useful financial information. Giving lenders secure access to this data will result in faster application processing and decision time.
As an innovative lender, Cashfloat is constantly on the lookout for technologies that will make your loan application process as seamless as possible.
- Streamlining Payments
At the moment, payment authorisation is a complex process which can be frustrating and time consuming for both customers and vendors. In contrast, Open Banking gives third-party companies such as Paypal more authority and flexibility to process payments quickly and easily.
How Safe is Open Banking?
One of the biggest concerns for bank customers is how safe their data will be under Open Banking. Experts say that it will be as secure as existing online banking. Currently, customers occasionally have to share login information due to incompatible operating systems- a potential security risk.
With Open Banking’s new data-sharing capabilities, client’s information will actually be much safer. However, the experts acknowledge that there are also more opportunities for scams when more data gets moved around.
In cases of fraudulent payments, the bank will be responsible for investigating the case and reimbursing the customer. It is the ICO’s responsibility to ensure that financial companies take data protection very seriously.
When will Open Banking Become Fully Operational?
The Open Banking directive came into effect on January 13th 2018. Despite repeated warnings, 6 of the big UK banks missed the deadline and needed an extension from the CMA. The second stage of ‘managed roll-out’ lasted until mid-April 2018. In this time several third-party providers applied for FCA approval to gain access to data and work directly with customers. At the moment, only data from bank accounts are available through Open Banking. However, over the next two years, credit card transactions and other payment accounts information will become available.
Experts predict some initial teething problems integrating the systems and issues with speed and ease of use. Despite this, Open Banking has the potential to revolutionise the world of finance and points towards a future of entirely virtual banking. This radical innovation in banking will propel us far beyond the minor advances of mobile banking and into the promising future of digital money management.