Open Banking forces the UK’s nine biggest banks – HSBC, Barclays, RBS, Santander, Bank of Ireland, Allied Irish Bank, Danske, Lloyds and Nationwide – to release their data in a secure, standardised form, so that it can be shared more easily between authorised organisations online. This data includes some simple records, such as the location of branches and the exact details of certain banking products. This first part of Open Banking went live in March 2017. It should make it easier to find banks with disabled access, for instance, or compare the features of different personal and business accounts in order to get the best deal.
The more important release concerns the data contained in transactions. Banks hold the authoritative record of everything we spend, lend and borrow – everything from electricity bills to mortgage payments to weekly spend on train travel and coffee – but, for the most part, they don’t make much use of it.
Open Banking makes it possible to pass this rich information to third parties, who can use it to create new products (more on this later). It’s not an app or a service in its own right. It’s a way of facilitating data sharing.
Why is Open Banking being introduced?
Banking in the UK has some big problems. Gulamhuseinwala lists them off: “People are paying too much for their overdrafts; money is sat in current accounts not earning interest; there’s not enough switching.”
After years failing to change this situation, the Competition and Markets Authority brought in Open Banking with the intention of increasing competition and innovation in the market. It comes along with several more immediate measures, such as a cap on overdraft charges (albeit one set by the banks themselves), but is by far the most radical measure being introduced.
Open Banking also part of a sweeping piece of European legislation known as the second Payment Services Directive, or PSD2. Sometimes the two get confused: essentially, Open Banking is the UK version of PSD2. The difference is that whereas PSD2 requires banks to open up their data to third parties, Open Banking dictates that they do so in a standard format.
This makes it much easier to use, so it should help startups (or the technology divisions of banks) create innovative new products. The exact nature of these products is actually a bit of a mystery – when Google put out its maps data, who could have foreseen Uber? But at this stage it’s possible to see three distinct trends.
Is it safe?
From a technical point of view, Open Banking is at least as safe as online banking. APIs – the technology used to move the data – are trusted and the law requires account providers to use strong customer authentication, a procedure which allows the payment service provider to verify the identity of both the user and the service.
Only startups that have been approved by the Financial Services Authority (FSA) will be allowed to use the system. However, just like online banking, increased movement of data does offer opportunities for scammers, who might try and trick people into sending over their data.
The key thing to remember: anyone using an Open Banking service will not need to share their banking login or password with anyone but the bank. This is actually an improvement on existing services, which sometimes require this as a workaround for existing incompatibility.
If something does go wrong with a payment, your bank should be able to help you get a refund. If someone misuses your data, then the case is subject to data protection laws and you will be able to complain to the Information Commissioner’s Office.
What’s the big deal?
If you’ve got this far and you’re wondering why Open Banking is such a big deal, that’s not surprising. Like the internet itself, its benefits aren’t immediately obvious – if someone told you about a bookseller with no shops, it would be hard to picture Amazon.
The system has the potential to upend the way we bank, disrupting the sector in the same way as media or retail. It could, for instance, enable digital-only banks that manage money automatically via intelligent software. Whether this is a dystopian or utopian future depends on your perspective – either way, it just became more likely.
What’s happening right now?
This question is harder to answer than you might expect, and has actually been the cause of some confusion. One common, quite understandable, misconception is that Open Banking launched on January 13, 2018. It didn’t. That was the day the regulation came into force, beginning the second stage of the process.
Open Banking is currently in what is described as a “managed roll out.” This means can apply to the FCA and be accepted as approved third parties in order to access the APIs. Once their certification has gone through – and you can check to see if they have been on the FCA’s register – then they can connect up to the new system and begin testing their products.
Open Banking Limited says we will start to see “a dynamic new range of financial services” from March 2018. We don’t have a more specific date than that.
One hitch: despite ample warning, six big high-street banks, including Barclays and HSBC, managed to miss their deadlines. The CMA gave them a six-week extension and is monitoring the situation.