What is open banking? Research suggests that the majority of people still have no idea. However, it could be something that fundamentally changes the way we manage our money.
Since 2018, regulations have meant that banks are obliged to let you share your financial information with third-parties, if that is something that you want to do. This initiative is known as open banking, and, in theory, it’ll allow you to better manage your money and spur the big banks to greater innovation.
In this article, we’ll tackle your questions in more detail. So, what is open banking? What are the benefits? And is it safe?
What is Open Banking and Why Does it Matter?
Open banking is the new set of rules that permit third-party providers of financial services to access your financial data at your bank, including your transaction and spending data. This, importantly, only happens if you want it to – and is only obligatory for the UK’s nine largest banks (currently).
The effect is significant. Open banking essentially transfers ownership of your financial and account information from the bank, who traditionally held it, to you, the consumer. You decide who can have access to that information.
This makes it easier for you to benefit from financial services offered by people who aren’t your bank. Traditionally, banks were much of a muchness: interest rates may differ between accounts, but the offer was otherwise similar. There was less incentive to innovate, and few people ever switched banks.
As a result, banks rarely developed new technologies or tools for customers. However, with open banking, this is expected to change.
What is the Benefit of Open Banking?
In fact, open banking is expected to benefit the banks involved, the third-party financial technology companies, and the customer. This is why it has been hailed as a “revolution in banking.”
Firstly, by making it easier for consumers to choose what financial services they want to use, open banking intends to promote competition in the financial industry. This may not sound like it would benefit the big nine banks necessarily. However, if they want to retain their customer base, they will need to embrace innovation – particularly when there are so many new services on offer.
For the customer, the potential benefits are as numerous as the different financial services available. There are over 200 regulated banks and fintech startups offering useful new ways for you to manage your money. However, without open banking, you may never have got to use them.
Because, for these to work, they need to see how you use your money: they need to see what you are spending, how, and to whom. As long as you give your explicit agreement that that is okay, you get to use the service that they are offering.
Open Banking Explained: How Does it Work?
One of the most important elements of the open banking initiative are what are known as the open banking APIs. Short for “application programming interfaces”, APIs are the technology by which banks can share their financial data with the relevant third parties.
So, what does an API do exactly? They make it possible for one company’s software to access smoothly that of another company. For example, Uber’s interface works on maps obtained from the Google Maps API. Google, in turn, gets its weather data from IBM’s weather API. Every time you are asked to “Log in with Facebook”, the app you are using in turn uses Facebook’s login API to verify your identity.
The nine big UK banks have each been obliged to create these APIs. However, at Revolut, we have created one too. These make it easier for third-parties to access the data that we store – if you give permission – without you having to give these third-parties your login details.
Is It Safe?
There has been a lot of talk about the security of open banking. For example, allowing third-parties to access your financial data doesn’t naturally sound like a clever idea.
However, open banking has been designed to be highly secure – and that’s precisely why it uses APIs. Rather than giving out your details and data, third-parties – who are authorised and regulated by the Financial Conduct Authority (FCA) – can access your data directly, thus cutting out a step at which your data might become vulnerable.
At the same time, there is absolutely no obligation for you to be using open banking at all. You need to give permission for third-parties to access your data – and you’ll need to keep giving permission every 90 days after that. This ensures that you are still happy with the provider’s service.
Summary: What is Open Banking?
Open banking means that you will always be able to make use of novel ways of managing your money. Budgeting apps and other financial technologies are continually imagining new ways to make your life easier – yet, without open banking, you may never have had the opportunity to explore them.
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