What is Open Banking?
Estimated reading time – 5 minutes
You’ve probably heard of open banking in the last few years but what is it exactly? Open banking means that you allow your bank to share details of your bank account with other authorised third parties. These can be other banks and financial institutions, as well as money management apps and retailers. For consumers, the idea is to give these third parties the chance to offer a more tailored service, related to particular spending habits.
At time of writing, open banking mainly includes giving authorised access to current accounts, but may be opened to other financial products, such as savings accounts and credit cards. Only the largest banks and building societies in the UK have had to transition to open banking by law, while it’s currently optional for smaller banking organisations.
Why is Open Banking important?
As the details shared between banks and financial services become more accessible to each other, this is intended to make services more competitive. For consumers, this can mean more choice and more flexibility, tailored around what they need. So with more access to your spending habits, other retailers and organisations can understand what’s important to you. This has the potential to offer greater competition between these organisations as they work out what consumers want.
What is the benefit of Open Banking?
Aside from improved service from companies getting a better grasp of consumer needs, there is another key benefit to open banking. If you have used online banking you might have found that it’s become easier to see where money is going, with many transactions shown in ‘real time’. This can make managing finances much easier, instead of waiting for a monthly statement in the post, or visiting a cash point or bank branch for a statement.
Currently, you may find that not all payments that go in and out of your bank account appear on your online banking statement straight away.This is where open banking can be a more important part of your money management. Having a freer exchange of financial data between retailers and banks, for instance, you can now see all incomings and outgoings much faster. This can effectively give you even more control over your finances.
What is an example of Open Banking?
When taking out a loan, this can sometimes be a lengthy process. In the past, you might have been asked to fill out a paper form, which is then sent back in the post to your bank, and then wait for approval. Through online applications, this has been a faster process, but you might still find there’s a need for security steps and requests for more details in order to complete your loan application.
Through open banking, and sharing of data, this can reduce the time of an application process. This means that your loan provider can see your financial transactions and use that to make a decision almost straight away.
Is Open Banking secure?
Open banking works through the use of APIs, or Application Programming Interfaces. APIs are fairly common, and are often part of how apps can work on your phone, allowing digital platforms to talk to each other. For example, if you’re shopping on eBay and you want to pay for an item, an API will take you straight to PayPal to authorise your payment. An API will then take you back to eBay to complete your purchase.
APIs that are set up for open banking have to meet a specific, financial grade. Financial-grade APIs work through authorisation and authentication. You give your permission for banks to contact third parties, which gives consent for open banking to be used on your account. However, with any financial transaction, whether online or not, there may be some risk of fraud. Your bank should be able to give you more information on open banking security, how they use APIs and what happens in case of fraudulent activity. It should be noted that this system of authorisation and authentication is designed to be as secure as possible.
This article was written on 19 November 2021; all information was correct at the time of writing.Visit our Knowledge Centre for more on money management and secure finances.
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