UK: Open Banking

Posted on: 5th February 2018 in Finance

“What is Open Banking?”

Results from a recent Which? survey indicate that over 90% of people asked did not know the answer to this question. The Guardian (8^th Jan 2018) describes open banking as the “quiet revolution,” going so far as to call it one of the “greatest shake-ups in personal finance in years.” The term “Open Banking” refers to a new series of rules that came in to effect on the 13^th January in the UK concerning how customers share their financial information with companies other than their banks. It means, in essence, that consumers will take ownership of their own data, so that account holders can choose who they share their information with. The idea is that if consumers are able to control their own data, and consolidate their personal finance information through handy apps, that they will have more choice, freedom, and importantly control, over their accounts and how their information is used. And ‘choice’ is really the key word here. Under Open Banking, individuals will have to give permission before any information is shared. Imagine how useful it would be to open one app and see all of your personal finances (bank account, credit cards, savings, investments) in just one place! Moreover, what if you were able to share this information with third parties, easily and securely, to ensure that you are getting the best deal for you? It’s easy to see why this is being called the “quiet revolution.” Banks have relied upon their customers’ loyalty and complacency over the years. Indeed, statistics reveal that only 3% of people switch their accounts to optimise the deal they are on. With the promise that this process will become exponentially easier and less time consuming, banks will be forced to step up their game in order to compete for the loyalty of their customers, and to generate new ones. This looks set to open up the banking market considerably, providing more choice and better deals for customers.  

How does Open Banking work?

Essentially, open banking means that your bank has to make your information available to third parties in a standard data format, at your request. The development of APIs (Application Programme Interfaces) means that your bank will be able to share your data using technology already familiar to many leading companies who provide integrated digital services (Google Maps and Uber for example). What this means for you: you can use one app to manage all of your accounts at different banks and move money between them. You could then use another app to check if you’d be better off at a different bank with lower overdraft charges, or higher savings rates for example. As the possibilities begin to open up, going forward you could even share your credit card history with a comparison service (in the same way we use insurance comparison sites for competitive quotes) to find the best place to move your debt. In theory, banks will have to work harder to keep your custom, and consumers will benefit from more competitive financial products and services.  

Why now?

In 2016 the CMA (Competition and Markets Authority) published a report on retail banking in the UK.  They found that the large banks are not competitive enough, and smaller, newer banks find it difficult to gain a foothold in the market. Open banking was devised as one of the means to bring change into a stagnating system.  

What is the Open Banking Implementation Entity?

The OBIE is a company that has been set up to implement and deliver open banking to consumers (see www.openbanking.org.uk) They are governed by the UK’s nine largest banks: Allied Irish Bank, Bank of Ireland, Barclays, Danske, HSBC, Lloyds Banking Group, Nationwide, RBS Group and Santander. Their task is to design and develop the APIs that the banks and building societies will use to share your information securely. “It aims to attract new providers and technology companies to enter the market and create more innovative services for customers.” (www.openbanking.org.uk)  

What are the advantages?

Exciting possibilities for managing your finances with ease – maximising your savings and minimising your debt – at the touch of a button. More choice and potential savings for consumers. Protection against fraud. Current apps that allow you to access multiple bank accounts in one place demand that you hand over your login details (known as screen scraping), placing the onus of responsibility on the customer for any fraudulent activity. With open banking, you’ll be able to authorise third-party access to your accounts without giving away your login details to a third-party. This means that the banks are liable for any fraudulent activity and must refund you immediately if you notice an unauthorised payment. Banks and third parties will be regulated by the OBIE to ensure legitimacy and compliance. You can check if a third-party provider is regulated with the Financial Services Register (https://register.fca.org.uk). Open banking is a choice. It is not an opt-out system, so if you do nothing your details and personal information will not be made available to third parties.  

What are the disadvantages?

Raises important questions about data privacy, security, and financial exclusion. Heightened concerns about cyberattacks in the wake of the recent Equifax data breach (criminals exploited a weakness in the system that allowed them access to the private data files of around 143 million customer. This included names, social security numbers, birth dates, addresses and in some cases drivers’ license numbers). With multiple providers sharing access to your data, identifying who might be liable for any loss of your personal data through cyberattack, fraud, or error, could prove complicated. Transparency has to be utmost so that consumers know exactly what will happen to their data once they have issued “consent.” Third party apps may have the appearance of being completely impartial but consumers need to be aware that they may not be getting “the best” deal out there for them, just the one that pays the app for new business.  

Open Banking and Financial Advice

At Holborn Assets we welcome any initiatives that increase choice for consumers and improve access to information. There is still much to be learned about how open banking will be implemented, what the security risks are, and how it will be received by consumers. Here at Holborn we are keeping a watchful eye on developments. Remember: Open Banking is a choice – your data is in no danger (imagined or otherwise) provided that you do not opt in when asked – and that is a decision you should discuss with your IFA.