If you’ve just started to explore open banking solutions, it may seem like this technology has come out of nowhere, but it hasn’t. It’s come off the back of several years of regulatory work, ensuring banks work harder (and smarter) for their users.
While it started off as a ‘compliance thing’ with guidelines for open data participants, it’s become so much more, helping drive innovation in FinTech.
‘It’s changing the way we live, work, and do business in the UK and globally.’ – Chris Noakes
Open banking is many things: a technology, a way of doing business, a product, a service, and a platform, depending on how you use the term. However, for us, it’s a mindset, connecting open, transparent networks to open commerce and ways of working. If anything, it’s the buzzword of our decade to refer to easy data sharing between banks and non-banks.
While you probably won’t have read a lot of headlines about this topic, this technology is improving financial products and services, helping vulnerable people and speeding up operations. Crucially, it allows businesses to serve more people in the UK in a competitive, user-centric way.
What is the point of open banking? Isn’t it a compliance thing?
Yes, it’s a ‘compliance thing’ in the words of Imran Gulamhuseinwala OBE, who spoke at Fintech Week London 2021. However, it’s also a ‘pro-competition compliance thing’ that will level the playing field.
- Previously, card providers had free reign in the payment space.
- Now, both consumers and businesses benefit from a competitive financial environment, leveraging data to make the most of financial decisions.
Do banks lose out?
It’s easy to think that card providers and banks will lose out. However, this is far from the case. Forward-thinking banks like NatWest are acting as third-party providers or TPPs in the new partner ecosystem.
In this new innovation-driven eco-system, everyone benefits.
Nonetheless, there’s been much discussion amongst the nine banks in regard to funding the costs of open banking. The Telegraph published an article covering the high costs of improvements with HSBC and Barclays demanding a ‘shake-up’ of how costs are funded. Many leaders asked if smaller banks should also fund the costs of improvements.
Defining the terms
At this point, it’s important we make a distinction between Open Banking and open banking. The former is an initiative led by the UK Competition and Market Authority to push the UK’s nine largest banks to comply with the UK implementation of the Payment Service Directive 2.
In a nutshell, Open Banking is a consumer-focused regulatory change to make financial services better and cheaper. What started out as a push to make switching service providers easier has evolved into something much more, an entire ecosystem.
The latter term, ‘open banking’ describes the use of APIs in financial services. APIs are secure digital communication channels, which stand for Application Programming Interfaces.
You’ll often hear Third-Party Providers, TPPs using the terms, ‘open banking’ and ‘open APIs’ when discussing the transmission of ‘read only‘ data sharing with the consent of an end-user. Consent ensures consumers know who has access to their financial data, what level of access is granted and their right to allow or deny access.
What is the OBIE?
The majority of open banking and data right discussions are led by the UK’s Open Banking Implementation Entity (OBIE), which sets the standards for PSD2 compliant technology at banks (since 2018). Consequently, the success of OBIE’s government-sponsored rollout means its standards and processes are global, used across the world.
PSD2 stands for The Revised Payment Services Directive, which replaced the earlier directive of 2006. The directive regulated payment services and payment service providers throughout the European Union (EU) and the European Economic Area (EAA).
The PSD2 came into force at the beginning of 2018 to level the playing field for alternative service providers to initiate payments, aggregate finances through mobile apps or give account access to insurers or lenders to determine affordability. The PSD2 is synonymous with open banking’s two regulatory aspects:
- AISP: The Account Information Service Provider (AISP)
- PISP: Payment Initiation Services Provider (PISP)
AISP and PISP are the legal permissions businesses need to access customers’ open banking data. Different regulators handle the application process for AISP and PISP permissions. In the UK, the FCA handles these permissions.
What’s open finance?
Open banking currently applies to current accounts. Open finance is the next step of open banking. With open finance, financial advisors and wealth managers can deliver made-to-measure financial advice on pension contributions, investments and determine creditworthiness.
Insurance providers can provide the appropriate cover with a full picture of a customers’ financial data, including creditworthiness and mortgages. Future implementation will happen when the recommended financial services are added under its umbrella (mid-2022).
In conclusion, open banking allows businesses to make better use of their customers’ financial data (with consent). It also allows companies to initiate payments to and from customers’ bank accounts or business bank accounts.
If this has raised a few questions or you would like to explore open banking, then please do get in touch. We have the knowledge, product, team and experience to help you.