Open Banking (OB) is an initiative introduced by the Competition and Markets Authority (CMA) – a UK government agency – whose primary role is to promote competition for the benefit of consumers.
The CMA established a new company – the Open Banking Implementation Entity (OBIE) – “to create software standards and industry guidelines that drive competition and innovation in UK retail banking”.
The recommendations proposed by the CMA would then be developed and overseen by the Financial Conduct Authority (FCA) – the organisation responsible for the conduct supervision of regulated financial services firms operating in the UK.
What was the background to Open Banking?
The UK government wanted to introduce more competition into the retail banking sector and make it easier for new financial service providers to challenge the dominance of more established banks. This led to the introduction of Open Banking and the formation of the OBIE.
Funding for the OBIE has been provided by 9 of the major UK banks who between them were legally required to develop secure and standardised operating procedures to make it easier for other approved financial services organisations to access customer information.
What was the objective of the Open Banking initiative?
The OB initiative has been described by the OBIE as a secure way for consumers and small to medium-sized businesses (SMEs) to share financial information (bank transactions data) with approved financial services providers.
By sharing information in this way, the aim is to make it easier for personal account customers of retail banks to manage their money more effectively; source the best loan and mortgage deals; and reduce unauthorised bank overdraft charges.
Open Banking (OB) would also allow SMEs better access to a wider range of funding solutions and facilitate a more effective comparison between products and services offered by different banks.
Ultimately, OB provides a framework for new financial service providers to introduce more innovative financial products and applications which give consumers greater choice and control over their finances.
What does Open Banking mean for consumers?
There are many potential benefits to consumers from the Open Banking initiative:
Streamline loan and mortgage applications:
For example, data sharing means the process of applying for mortgages or personal loans becomes much more streamlined. By allowing lenders electronic access to transaction data in your bank statements, you avoid the admin headache of submitting paper documentation and ultimately save time and effort.
Innovation in Fintech applications:
The OB initiative is also beginning to have a significant impact on the Fintech sector with an increasing number of innovative banking and financial products coming to market. These include the introduction of investment management apps and personal finance apps which can be downloaded to your smartphone or tablet.
Improved money management:
Money Management Apps allow consumers to create dashboards and other financial tools which help them to better manage their finances. Consumers can see at a glance how they spend their money on a day-to-day basis, analysed by type of expense. For example, the dashboard can summarise how much is spent each month on coffee, travelling, food etc and compare that to previous months.
Better financial decision making:
By having access to this detailed information, the idea is that consumers will make more informed decisions about how they spend their money (what expense they can cut back on, for example). Potentially, this may encourage better savings and more proactive, long-term investment planning decisions.
How does Open Banking work in practice?
Banks and Building Societies that have signed-up to OB are required to share certain financial information with other FCA-regulated financial service providers.
Data is shared through the use of Application Programming Interfaces (APIs); these enable different software applications to ‘communicate’ with each other.
Therefore, APIs allow approved companies instant access to customers’ bank account statements. Agreeing to electronically share this transactional data can only be given with the express consent of the customer.
For example, if you were applying for a car loan and the lender needed evidence of your income and expenditure for the past six or twelve months; then you could authorise your bank to release that information to the car finance company.
Open Banking security measures
Customers have full control over which approved financial service providers can access their financial data, what they can do with this data and for how long. The data is secure, encrypted and its usage is monitored so that only authorised providers have access.
In addition, at no point will users be expected to share their bank security and log-in details with the third party provider.
