Open Banking Explained

Open Banking has the potential to have a huge impact on the finances of both businesses and individuals. To help you understand what it could mean for you, we take a look at what Open Banking is, how it works, and how you could benefit.

What is Open Banking?

Open Banking is a new method of securely sharing your bank account information. If you provide consent, your bank can share your account data directly with a regulated third party. The third party can then provide you with new products or services as a result.  

Why has Open Banking come about?

The Competition and Markets Authority (CMA) wanted to help level the playing field between major banks and other providers. As banks hold individuals’ account information (which is essential for lots of products), they have an advantage when it comes to selling other financial services.

However, Open Banking allows other providers access to that data (with your consent). The aim is that they can then build products and services that are quicker, simpler and more secure than they would otherwise. Increased competition hopefully means more innovation, and more choice for customers like you.

The regulations are now part of EU law and are being implemented by Open Banking Implementation Entity in the UK.

What are the advantages of Open Banking?

Open Banking can be helpful in different ways. For example, you could allow a personal finance app to access your bank info from multiple accounts, making it simpler to manage your finances in one place. Or, if you are applying for credit, it could save you from having to manually download and send bank statements to the lender.

How can my business benefit?

It may take time, but you could see both efficiency and monetary benefits for your businesses. Open Banking should make it easier and quicker to apply for finance, and help you get a faster decision. New products and services could help you manage your cash flow, create forecasts and help you better understand your financials to make the best decisions for your business.

Of course, this all depends on you giving consent. Many are reluctant to share financial information and are particularly wary of sharing data online. Despite this, PwC are still expecting 71% of SMEs to adopt Open Banking by 2022.

Who can use Open Banking?

Currently Open Banking is available to individuals and SMEs with a turnover of up to £6.5 million. However, this £6.5 million threshold may change in the future.

What information can be shared?

Mostly it’s current account information that can be shared at the moment. However, we’re still in the early stages of Open Banking, and other products are due to be made available in late 2019 and beyond. They include credit cards, currency accounts, charge cards, e-wallets, pre-paid accounts, loans, savings, mortgages and more.

The data shared is known as ‘transaction level’ information. This is the line by line list you see on your bank statement, showing the date, amount, recipient etc.

How long will the information be shared for?

Depending on the service, the provider may ask for one of two options:

• One-time access – access at a single point in time, for a loan application for example
• Ongoing access up to 90 days – continued access for a period, useful for a finance management tool (you can revoke consent at any time)

When is Open Banking going live?

Open Banking first went live in the UK in January 2018. There were some problems initially, with only five of the nine banks meeting the deadline. Most are now up and running though.

The UK is currently in the implementation phase, which runs until September 2019. As mentioned above, we expect more products to be included after this time, but it will likely be a gradual process where different providers start using it for different things. It’s unlikely to be a sudden change where all your products are using Open Banking overnight.

As more businesses start to use Open Banking in their products, and customers become more familiar with it, then we’ll start to see it’s use grow and grow.

Which banks are taking part?

Nine banks have been legally obliged to offer Open Banking services since last January, they are:

• Allied Irish Bank
• Barclays
• Bank of Ireland (inc the Post Office)
• Danske
• HSBC Group (HSBC, First Direct, M&S)
• Lloyds Group (Lloyds, Halifax, Bank of Scotland)
• Nationwide
• Santander
• Royal Bank of Scotland Group (RBS, Natwest, Ulster)

Other banks are also joining voluntarily, such as Starling Bank, Monzo and Clydesdale.

From 14th of September 2019, all banks that provide payment accounts will need to offer access through open APIs (the same technology that Open Banking uses). 

What are the security risks?

The security standards for how data is transferred have been set by a UK government body called the Open Banking Implementation Entity, who are making security a top priority.

Only regulated providers can use Open Banking, and they have to abide by the correct standard. Not only do they need to make sure your details are safe, they can only use their access to provide the service you’ve given consent for. Your bank or building society will also pay you back if fraudulent claims are made.

The information and views contained here are provided solely for informational purposes and should not be construed as legal, tax, regulatory, accounting or investment advice, or as a recommendation or an offer by Funding Circle.

If you have any questions, please speak to your professional adviser or seek independent specialist advice.