Have you logged into online banking sometime in the past three years? You’ve probably seen open banking mentioned there. Work in financial services or the tech industry? You won’t have escaped hearing about it. But for some of us, it’s (understandably) a bit of a hazy concept. Like all new technologies, open banking comes complete with its own language. Terms like ASPSP and SCA (that’s account servicing payment services provider and strong customer authentication respectively) feature heavily. Jargon like this is unhelpful and off-putting. It’s also at odds with the ideals of clarity and transparency that lie behind the open banking movement. So how should we think about open banking? Put simply, it’s about sharing information. The idea is that this can give consumers access to a wider range of financial services to better meet their needs. Importantly, consumers should always be able to choose whether or to what degree they are happy to take part.
A short history of open banking
While we’re now hearing a lot about open banking, in the UK it began without much fanfare. Historically, change in the banking industry has been minimal and a bit slow to capture the public’s attention. This is reflected in a September 2017 survey by Which? The consumer group asked nearly 4,000 members of the public about open banking. More than 90% had not heard of it.
The concept was born when the Competition and Markets Authority released a report stating that UK retail banking was “not as innovative or competitive” as it needed to be. Work to improve these traits led to a new piece of legislation, sometimes known as the second Payment Services Directive (or PSD2). It came into force in 2018. Under PSD2, the biggest banks in the UK have to give other authorised parties access to some of the information they hold on their customers’ accounts and transactions. Banks must store this data in a standard format to make sharing easier.
They also have to make sure it is secure and only share it with approved entities. As shown by the Which? survey, the general public had little awareness of open banking at this stage. They would likely have been surprised to learn that banks had already made moves to comply with the new laws. In March 2017, the big banks began to share some basic information such as ATM sites and full details of their products. This allowed them to meet some of the more generic, impersonal open banking rules.
Open banking in practice
Now we’ve covered the background to open banking, we can take a look at how it might work in practice. Let’s say Amanda runs a manufacturing company and holds a business account with Big Bank UK. She wants to take out a business loan to help with the launch of a new product. Before open banking, Amanda might have only approached Big Bank UK, hoping it could offer her the funds at a favourable interest rate. Or she could have chosen to shop around on her own behalf, but this would likely involve a lot of work and uncertainty. She would have to carry out her own research. She would also have to hope that Big Bank UK would disclose the information needed by other potential lenders to let them make a decision. But now she can ask LoanSearch, a third party, to find the best loan for her.
Under open banking rules, LoanSearch is an authorised third-party provider or (TPP). If Amanda opts in to open banking on this occasion, Big Bank UK must share her (relevant) data with LoanSearch to help her find the best deal. In turn, LoanSearch can compare her information with detailed product offerings from other large lenders to find her the best deal. To do so, it uses an application programming interface (API). In open banking, APIs are the connections that allow the banks and TPPs to share information and talk to each other. The innovative companies that build these connections are among the biggest driving forces behind the changes. This is only one example of open banking in practice. In reality, it spans a breadth of financial activity from individuals and businesses running accounts, to online transaction systems and anti-fraud measures. If you’ve found this brief overview useful, you can learn more about these detailed topics here.