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In practice, Open Banking refers to the secure sharing of financial data between UK banks and third-party providers, such as alternative lenders, price comparison websites, and online payment systems.
Introduced in 2018 by the Competition and Markets Authority (CMA), Open Banking was designed to bring greater competition and innovation to the finance industry. In doing so, consumers should receive a better and fairer deal when choosing a financial product or service.
There are now over 3.8 million consumers and businesses using Open Banking-based products in the UK, a figure which has more than doubled since the start of 2020. Currently, the nine biggest banks and building societies are enrolled on the Open Banking Directory, with many more expected to join soon.
How has Open Banking developed over the years?
Since 2016, when Open Banking was first proposed, about 400 UK fintech companies and other providers have started using it. Even though the idea promised big changes, progress has been slow.
The biggest banks in the UK have been slow to adopt Open Banking. This is partly because they have to meet certain compliance rules. They’ve also been accused of deliberately stalling to keep control over the valuable customer data they hold.
People have also been cautious about sharing their financial data. To make it safer, new rules since September 2019 require Strong Customer Authentication (SCA). This means users need to give extra information before they can complete transactions or access their accounts, adding an extra layer of security.
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How does Open Banking help customers?
Open Banking has many benefits for both personal and business finances. It lets you see all your bank accounts in one place, even if you have accounts with different banks.
You can make payments directly from your bank without needing to use your card or extra details. It also helps you see how and where you’re spending your money, which can help you budget better and save more effectively.
It’s also an exciting innovation for SME business owners, not least by removing the hassle of day-to-day financial tasks with new time-saving software like budgeting apps and accounting platforms. By allowing banks to share data with alternative lenders, who then get instant access to a company’s transaction and credit history, businesses can get faster and fairer decisions on their funding applications.
The heightened transparency in the market also provides SMEs with a much better idea of the range of products and services that are available so they can make a more informed choice. In the case of price comparison websites, Open Banking allows these third parties to analyse a company’s unique spending patterns and make tailored recommendations on a better business credit card, current account, or overdraft. This means businesses can get the best deal based on their own specific needs.
How does Open Banking help finance providers?
The ability for customers to instantly share financial data has a huge impact on alternative lenders and their internal processes. Customers are required to share information about their financial health so that lenders may perform affordability checks, verify incomes, assess credit history, and decide on the eligibility of a borrower for a loan. As applicants will no longer need to trawl back through past bank statements and provide copies, lenders can significantly speed up the time between an application and a lending decision.
Not only is decision-making faster, it’s also much fairer and safer. Lenders can get an accurate, up-to-date picture of a customer’s financial position, and whether they’d be able to manage their repayments, which prevents misguided lending and helps the lender reach a valid proposal. With more financial information available, lenders can give better advice and offer products that match their customers' needs.
Accountants also benefit from Open Banking. They can see more details about their clients' accounts and spending. This helps them give better advice based on accurate information. Plus, since some of the routine tasks can be automated, accountants can work more efficiently and spend more time helping their clients.
You can learn more about how Fleximize uses Open Banking here.
Your common questions answered
Open Banking lets banks share your financial information with other trusted services. This means you can use apps and services to manage your money better and find better financial deals.
Some Open Banking examples include:
- Budgeting apps like Yolt or Emma can help you track your spending and create budgets by pulling in data from multiple bank accounts.
- Comparison sites like MoneySuperMarket or ComparetheMarket can analyse your spending patterns and suggest better deals on loans or credit cards.
- Payment services like TransferWise or Revolut let you make international payments directly from your bank account without needing to enter card details.
These tools make it easier to manage your finances and find the best options available.
Yes, it is safe.
It uses extra security steps, like asking for more information from you before completing any Open Banking payment transactions, to protect your data.
Open Banking is a way to let financial apps access your bank account information securely. This helps you track your spending and find better financial products.
The idea of Open Banking is to make financial services better and more competitive.
By sharing your financial data with other services, you can get better deals and make smarter choices.
An example of Open Banking is using a budgeting app that connects to your bank account. This app helps you see how much you’re spending and offers advice based on your bank data.
In the UK, Open Banking allows you to securely share your bank information with apps and other services.
This helps you compare financial products, manage your money, and get faster loan approvals.
Some downsides of Open Banking include concerns about privacy and the risk of data breaches.
Since your financial information is shared with other services, it could be misused if not handled properly.
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