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What is Open Banking?

15 January 2021

Open Banking is a set of rules, regulations and mechanisms used to share customer banking information. 

Essentially, customer data is verified and shared in a synchronised ecosystem to help solve customer needs and to encourage innovation in the financial services industry by opening the way for new financial products or services.

There is one very elegant condition to Open Banking which is that financial service providers are not permitted to share any customer information without their explicit consent. 

The importance of Open Banking is that it responds to present day consumer demands, and reflects the updated customer expectations of the modern era. The banking industry like the legal services industry is centuries-old, so it has always been a traditional sector. 

However, in recent times there has been a growing demand for digital banking technology including interactive smartphone apps for money management.

The Open Banking Initiative responds to this dynamic affording the opportunity to reshape and restructure the competitive landscape to improve the consumer experience. There are two parties who benefit from this:

Firstly, the consumers can take advantage of an internal market which means that the end user have a wider range of options to choose from when deciding which financial products they need, and they'll be able to find these products in a far more convenient way

On the other hand, financial service providers can see what their competitors offer and with this view can take the steps they need to improve the consumer experience. It also allows new players into the market, including challenger banks, which ensures that the market remains competitive and protects the industry against monopoly behaviour. 

In terms of background, Open Banking grew from industry competition regulations back in  October 2013 when the European Parliament adopted the Payment Service Providers Directive (PSD2) which included new rules to promote the developer of innovative online and mobile payments.

In the UK, the Competition and Markets Authority (CMA) laid out rules for the nine largest banks and building societies in the UK, which collectively held over 90% of the marketplace, to bring forward the release of their data in a secured form so that the datasets can be shared more easily with other organisations in the wider financial services industry.

In addition to this, the Financial Conduct Authority (FCA) laid down rules to ensure the protection of customers account information in partnership with the Information Commissioners Office (ICO). 

If we move forward to 2020, what we have seen is an increasing number of FCA regulated providers up from 9 to 202, and these additional providers in the marketplace are also rolling out Open Banking in response to customer demand.

That is why today we see much more digital transformation in banking and also for consumer credit firms. Each of these organisations are adopting the same standards for identification, verifications and ensuring portability for customers as well.

How does Open Banking work from a technical perspective? 

In the past, this was achieved using screen scraping – this is a computer programme that acts to expose and copy information such as visual data and text. For example, a form or application would be scanned, and it would be rendered into a digital record.

However, the industry has now accepted that this process isn’t robust from a security perspective so recently there has been a move towards building and using APIs (Application Programming Interfaces) which provide a secure and effective way of transferring large datasets between financial service providers. 

APIs are now an integral part of data security technology across the industry as they provide a secure and effective way of exposing the data with sets of codes and protocols to decide how different software applications should interact with one another.

They also played a key role for the functionality of banking as a service (BaaS). This is a key element of Open Banking as it is an end to end process that connects Fintechs and other third parties directly into the system.

As part of this, banks are taking extra steps to protect their customers against the risk of data breach. Identification and data management are two key elements when it comes to open banking implementation. 

For example, strong customer authentication is required by the FCA and consent management is also important as the regulations prevent the sharing of customer data without explicit consent. These two will come together to ensure that the right security aspects of them considered it comes to the customers they share.

Let’s take a simple example. If a customer is looking to open a new savings account, they can find accounts with a higher interest rate or if they are choosing a credit card they can find a lower interest rate. Through open banking, they can choose between a range of providers and make the best decision on a product-by-product basis. 

Since 2018, Open Banking Regulations have been more influential resulting in more Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs) who are working in partnership with established banking institutions to develop a greater variety of financial services for customers. 

What is your outlook for Open Banking over the next few years?

I think we will see a continuation of the current trend for digitisation of financial services, greater transparency and more innovation in this field. This is something that we are working on over at Arum Consultants

Actually, many commentators believe that we will see further digital transformation as a result of consumer demand, especially from younger tech-savvy consumers who are used to running their whole lives from a smartphone rather than via traditional mediums. 

Over the next decade, we should expect a proliferation of value-added services which are not only extremely user friendly, transparent and secure but also integrate with a wider range of related services, increasing the level of technical complexity in Open Banking.

For the consumer, that will mainly be a positive trend, but some financial service providers may face challenges in terms of security, accessibility and also the agility required to adapt legacy platforms.

The overall result of these changes however will likely empower both organisations and consumers make better informed financial decisions – which ultimately is the guiding purpose of the regulation and something that society will benefit from moving forward.

Find out more about Newsha's story at our sister company Arum.