What is Open Banking?

After the financial crisis, there was a recognition that banking concentration could be disadvantageous – both in terms of competition and systemic risk. Since then, regulatory measures have sought to boost diversity in financial services, the most notable of which is Open Banking.

Launched in the United Kingdom on 13^th January 2018 following the second Payments Services Directive (PSD2), Open Banking gives third-party financial service providers – namely Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs) – access to consumer banking, transaction, and other financial data, from banks.

The promise

Before the advent of Open Banking, no real value was being extracted from the expensive data banks held on their customers. Today, however, this data can be accessed and exploited by fintechs, who may deploy their analytical capabilities to create personalised recommendations, services and customer experiences. 

Open Banking, therefore, is a major milestone in the journey toward sharing banking data between parties to boost industrial competition, hand more options to end-users, and generate innovative capabilities in the marketplace.

Use cases

So, what does this mean in practice? There are three key areas firms have been able to target to add value:

1. Aggregation services – which access and display financial data from multiple providers, offering greater convenience and efficiency
2. Budgeting and debt management services – which help users analyse their own financial data
3. Debt advisors, product comparison and personal recommendations – which are considered the highest impact

In terms of specific services, this means Open Banking can facilitate the delivery of products such as identity verification, payment reconciliation, affordability checks, payroll, creditworthiness assessments, smart overdrafts, income verification, refunds, multi-banking, subscription payments, tailored insurance, loyalty programmes, and more. The possibilities are nigh on endless.    

The nuts and bolts

Technologically speaking, Open Banking can deliver on the promise of innovation, transparency and competition across financial services, thanks to its deployment of Application Programming Interfaces (APIs).

Simply put, APIs are engine-like technologies that transport requests – in the form of data – from system A to system B. These systems could be devices or applications, but the data moved between them informs the tributary system exactly what a user would like actioned. On the ground, this process enables developers to harness technology so that individuals and SMEs can share financial information held by their banks with third parties and, in turn, facilitate the creation of innovative products.

The Finextra article, Open banking year six: JROC’s priorities and the UK’s future roadmap, explains that open APIs are used by “third-party developers to build applications and services for a wide variety of financial institutions – known as open finance. These services may include mortgages, savings, pensions, insurance, and consumer credit.” Evidently, Open Finance is levelling the playing field for the banking industry and has “provided consumers with an even better experience.”

“It also enables wider integration, to include non-financial industries, such as healthcare and governance, and the ability to provide personalised solutions in support of financial inclusion.”

The future

But what of Open Banking’s potential? How might it evolve in the coming years?

Helping to guide the proceeding steps in the UK is the Joint Regulatory Oversight Committee (JROC), which in April 2023 published recommendations for the next phase of Open Banking. In a Finextra article, House of Lords peer, Chris Holmes, explains that “the JROC proposals will transition from the Open Banking Implementation Entity (OBIE) to the Future Entity by January 2026.”

“The Future Entity will be at the heart of the open banking ecosystem for the long term, taking forward the role of a central coordinating and standard setting body; enhancing and standardising the open banking experience for all,” writes Holmes. “The standards it sets and maintains, and the services it provides will be the backbone of open banking. It may also have the ability to expand to support other industries and to help to deliver progress against related Smart Data initiatives.”  

Perhaps the most practical next-step for Open Banking will be Variable Recurring Payments (VRP), which “act similarly to direct debits, transferring money from one account to another at regular intervals under specific mandates set by the payer. However, unlike direct debits, they settle in real time; account details do not need to be shared; and are customisable.”

To learn more about the UK’s future open banking roadmap, see Finextra’s article on the Joint Regulatory Oversight Committee (JROC)’s next priorities.

The rub

This potential can only be fulfilled if some of the inherent risks around Open Banking are resolved. With increased access to data, financial privacy – as well as the security of consumers' finances – is at greater risk. This may imperil financial institutions too, which would bear the brunt of liabilities.

Of course, APIs are not invulnerable and can – while rare – become exposed to malicious third-party applications that empty consumers’ accounts. More likely are issues such as data leakage, due to sub-par security measures, and insider threats. All these risks will heighten as data becomes more interconnected.   

As ever, the solution here falls with both the providers – which must guarantee the requisite data protection safeguards are observed – and the consumers, whose duty it is to ensure their providers are authorised, in the FCA Register or the Open Banking Directory, before granting permissions.

The nub

Open Banking has served to transform traditional business models. Before its introduction, value chains worked via the pipeline model, whereby banks extended their customers financial products, in exchange for a fee and access to their transactional data. Today, value is being generated outside of the traditional banking sphere, enabling AISPs and PISPs to own the primary customer relationship. This is a powerful transformation, guaranteeing Open Banking’s continued, global impact across countless industries.