Opening the Door to Open Banking

In this blog we take a look at Open Banking, how it works and what it can offer customers and service providers alike.

Published by Hamish Kerry

Open banking is a banking practice that gives non-bank financial institutions and third-party financial service providers open access to consumer banking, transaction, and other financial data from banks and non-bank financial institutions through the use of application programming interfaces (APIs). It makes it possible to network customer accounts and data across several institutions so that it may be used by customers of financial institutions as well as providers of services offered by third parties. 

Open banking is rapidly becoming a significant source of innovation that has the potential to completely transform the financial sector.

In this blog, we’ll take a look at the real world impact of open banking, and explore how public acceptance has fuelled new interest in the placement of open banking frameworks within a continuing range of services.

How does Open Banking work? 

Support services frequently encounter the problem of people having difficulty locating pertinent information or lacking the knowledge necessary to make educated decisions. Here, Open Banking can be useful. A person's financial information can be accessed by apps and websites made by developers utilising secure APIs, and this information can then be used to offer the person in question pertinent support and guidance.

For instance, if someone is having trouble paying their utility bills, an app may access their bank account information and give them details on grants or assistance programmes for which they may qualify. By automating the process of giving information and support, this not only makes it easier for people to receive support but also lessens the workload on support services.

In this way, open banking increases financial independence and agency within the customers of services that utilise it.

In traditional banking relationships, the merchant or service provider is cut off from seeing the majority of financial information that would help improve the service or product they can offer the potential customer.

With Open Banking, the relationship between the merchant and the bank is controlled through API’s, allowing for a holistic view of the customers financial profile to be taken into account when offering services and products. This additional information, securely processed, gives users increased freedom to choose suppliers that fit more accurately with their financial needs.

In a report released in February 2023, Open Banking Limited outlined the intense growth businesses within open banking have experienced in recent years. They cited CMA9 data which showed 7 million consumers and SMEs used Open Banking services in January 2023. 

CMA9 describes the nine largest banks in the UK in terms of current account providers, with the group including Allied Irish Bank, Bank of Ireland, Barclays, Danske, Lloyds Banking Group, Nationwide, NatWest Group and Santander; alongside HSBC, as defined by the Competition & Markets Authority.

The increase in users comes just one month after the CMA Roadmap was completed and on the fifth anniversary of the Second Payment Services Directive (PSD2), which made Open Banking a regulatory requirement in the UK.

How can 3rd party services make use of open banking?

Account aggregation:

Account aggregation is made possible by open banking application programming interfaces (APIs), which enable apps to establish a secure connection to the bank account of a user and get that user's financial data. This information may include account balances, a record of previous transactions, and other account-related details. Apps are able to give customers a comprehensive perspective of their financial situation by combining the information that is available from their various bank accounts. Those who have numerous bank accounts or credit cards may find this feature especially helpful because it enables them to more effectively manage their cash flow and prevents them from incurring overdraft fees or missing payments.

Payment initiation:

Payments can be initiated directly from a user's bank account when using open banking application programming interfaces (APIs). This can be accomplished using a method that is referred to as "payment initiation," in which the user grants authorisation to the app to carry out a payment on their behalf. Users will no longer be required to manually enter their banking information or make use of a separate payment gateway as a result of this change, which should assist to make the payment process more streamlined. Because it involves stringent user verification and is subject to stringent regulatory criteria, payment initiation can also be more secure than traditional payment methods.

Identity verification:

Open Banking APIs can be used for identity verification purposes, such as verifying a user's name, address, and date of birth. By accessing a user's bank account information, an app can confirm that the user is who they claim to be. This can be particularly useful for fintech companies that need to comply with know-your-customer (KYC) and anti-money laundering (AML) regulations.

Credit scoring:

With the help of Open Banking APIs, a user's financial information can be accessed and a credit score can be produced. This can be done by looking at the user's income, credit history, and other financial information to figure out if they are creditworthy. By giving lenders a more accurate and up-to-date credit score, open banking can help them make better lending decisions and give better rates to borrowers with good credit.

Personal finance management:

Open Banking APIs can be used to give advice on budgeting, saving, and investing, among other tools for managing personal finances. By looking at a user's financial information, apps can give them personalised advice and tips on how to handle their money better. For example, an app could suggest a savings plan based on a user's income and spending habits or give investment advice based on the user's risk tolerance and financial goals.

Fraud prevention:

Open Banking APIs can be used to keep an eye on what a user is doing with their bank account and spot any strange transactions. This can be done by looking at a user's transaction history for patterns that could point to fraud or other suspicious activity. If the app finds a transaction that looks fishy, it can let the user know and take steps to stop more fraud. This can help make banking more secure for users and lower the risk of fraud-related financial losses.

To conclude

Open Banking technology has the potential to revolutionise the support service sector, enabling individuals to access support and advice more easily and reducing the burden on support services. By using open APIs to access financial data, developers can create apps and services that provide individuals with personalised support and advice, making it easier for them to access the support they need. However, it is important for developers to ensure that their apps and services comply with relevant data protection laws and regulations, and to implement robust security


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