What is open banking?

Open banking is a set of developments that allow third-party financial service providers to access consumer banking data, transaction data and other financial data, using application programming interfaces (APIs). This data can come from both banks and non-bank financial institutions.

Open banking is a significant source of innovation for a huge number of businesses and services, and banks and financial institutions are utilising these developments to improve their service offering and expand the scope of the services available to users.

It allows consumers, financial institutions and third-party service providers to better network and communicate with one another by sharing data more freely. While this can sound like a scary prospect for some consumers, there are strict requirements surrounding open banking to ensure the safety and security of user data.

How does open banking work?

Open banking depends on APIs (application programming interfaces). APIs are structured ways for one software to offer data and services to other softwares. Essentially, APIs are simply ways for software to communicate with one another.

APIs are effectively the instructions for how a third party can access a range of different data from a bank (account details, details of different products and services available to users, details of payments and payment service providers, for example). These APIs need to be agreed upon by all parties involved in the open banking initiative, including government bodies, regulators, banks and third-party financial services.

Then, it’s up to banks to build them, and third-party services to integrate their operating systems within these structures. Finally, the new products are created and ready to be shared with consumers in both B2B and B2C contexts.

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The benefits of open banking

The development of open banking and new banking technologies has changed the way millions of customers and businesses use their banks. It’s also massively beneficial for banks and fintech businesses themselves.

Benefits of open banking for financial institutions

  • Instead of centralised technologies, open banking uses improved networking to share financial data.  This allows banks to more securely share financial data and information with institutions. 
  • Open banking has helped to democratise the finance space, breaking down barriers for new products and companies to enter the market.
  • New players and smaller organisations in the industry have access to the same data as big corporations, which allows them to create more affordable alternatives to traditional financial services
  • This increased competition in the sector also means that even traditional finance institutions need to quickly grow and develop to improve their offerings alongside those of so-called “challenger banks”.

Benefits of open banking for consumers

  • Open banking not only democratises the process for banks, but for users too. 
  • Users will find it easier to carry out a range of processes that have historically needed to be done manually. For example, open banking can help facilitate the automation process of switching to a new bank within only a few hours! In the past, this process could take several days, and up to weeks in some cases!
  • Open banking APIs and their related technologies can also look at consumers’ transaction data on behalf of customers to identify the best financial products and services for them. For example, these technologies can recommend accounts with better interest rates, or credit cards with better terms than their existing providers.
  • Open banking allows for the implementation of advanced analytics, which can proactively advise customers on their finances if they so wish!
  • With open banking, consumers have access to a broader, deeper, and more comprehensive range of services than they would have had access to with traditional digital banking.
  • Open banking allows users to pay from their bank account for consumer goods and services. This allows for increased security and transparency over their payments and payment history.

How do I know open banking is safe?

The concept of sharing banking information with third parties is a daunting one for most users, so having rigorous security processes in place is vitally important.

Open banking uses rigorously tested software and security systems for all of its operations. Users will never be asked to give third parties their bank login details or password. No organisation other than their own bank or building society will ever need these details – this is one of the main security functionalities of open banking.

Only apps and websites regulated by the financial conduct authority or European equivalent can enrol in the open banking Directory. The open banking directory (or OBIE in the UK) is another key security feature at the very heart of open banking. Only FCA regulated businesses can join the directory to ensure the safety of consumers and their data. Data shared through open banking is also still protected by data protection laws and the Financial Ombudsman Service.

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The risks of open banking

Open banking is not unsecure as many users think, but it does come with its own risks.

  • The financial privacy and security of individual consumers’ finances can be at risk, which also increases liability for financial institutions.
  • There is a possibility that open APIs for banking can threaten the security of a customer’s account due to the potential for malicious applications to take money out of a customer’s account as a result of open APIs
  • If users work with a third-party provider that isn’t properly regulated, they won’t get the same levels of protection against fraud. This means that banks might not be liable to reimburse them if money is lost. If users are happy with a provider, they can still choose to give access, but there are extra risks associated with unauthorised providers, and it is not recommended by most financial authorities.

As with almost all new types of technology, open banking faces the same challenges, including misinformation and a lack of trust from users. However, security measures among open banking-supported applications are some of the strictest around to help contend with this and put users’ minds at ease.

What kind of data are you sharing when using open banking?

When users are offered access to open banking technologies, they might have concerns as to what data is being used, and in what way. This is very understandable! However, open banking is not mandatory and the only time that open banking tech will be used is when an end-user requests it.

There are a few kinds of data that can be shared through open banking if the customer consents to it:

  • Account holder name
  • Account type (savings account, current account etc.)
  • Account currency (Pound, Euro, American Dollar etc.)
  • Account open date
  • Account transaction details (amounts, merchants, etc.)
  • Regular payment details (standing orders and direct debits)

This kind of data allows third-party tools to understand exactly how a user banks, the kind of purchases they make, where their income comes from and much more. 

Payment initiation

Payment initiation is one of the most significant developments in open banking technology and allows users to make secure, intelligent payments using their bank details, rather than using a credit or debit card. This has benefits for both users and merchants, as it allows merchants to better differentiate between transactions, and provides an improved user experience and better security for end-users.

Rather than logging into their online banking account and going through all the steps to complete payments, the payment provision can now be initiated by other software, apps, or websites (if the account holder consents) and the payment process can be carried out more quickly.

Product and services data

By giving open banking platforms access to the bank account data listed above, banks and third-party providers can share relevant data and information regarding their products and services.

Traditional, in-person banking or online banking requires users to do their own research or meet with a banker in-person in order to switch to a better account. With open banking, finance providers and banks can offer these to customers proactively, when applicable.

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How can I check if an open banking service is a scam?

You can verify whether a company has been authorised by the FCA or the Open Banking Directory, and providers should also tell you whether they’ve been authorised through their websites or apps, along with their registration number.

How will sharing my account information work?

When you sign up with any open banking service provider, they have to ask for your explicit permission to access your information. They’ll then send a request for data to your bank, who will process it in line with a range of stringent legal requirements before sharing your details.

Can I opt-out of open banking?

Yes, you can easily opt-out of open banking. Open banking is not mandatory and will only ever be used if you specifically ask an open banking provider for their services. Providers can only use your data for the purposes they’ve said they will – any other functions will need additional permissions which they have to ask you for in advance. You can also revoke your consent and permissions at any time.

How does open banking work for online shopping and payments?

To pay using open banking (also known as Pay by Bank), the consumer selects the pay by bank payment option at checkout. Then, you’ll be redirected to your standard online banking platform to confirm the payment. In order to appropriately authorise the payment, most pay by bank options will use biometrics like fingerprint recognition or Face ID.

Then, funds are directly transferred from the customer’s account to the merchant’s account, without the involvement of any third party network in the transaction.

How can I check if an open banking provider is authorised?

All authorised open banking organisations must be enrolled on the OBIE directory. This allows them to use open banking architecture and to have their identities authorised.

Furthermore, all providers are required to comply with data protection laws, including the General Data Protection Regulation (GDPR). Providers should inform customers precisely which data they will use, how long they intend to keep it for, and what they intend to do with it before they sign up with a provider.

Does my bank or building society offer open banking?

Currently, nine major UK banks offer open banking, along with many smaller banks, building societies and financial services providers.

You can find a full list of all open banking providers on the centralised open banking website.

To learn more about open banking, pay by bank technologies or payment processing, please don’t hesitate to get in touch with the team at Acquired.com. We can support businesses with our proprietary Pay by Bank solution and help streamline their payment processing operations.