Opening Up - What is 'Open Banking' and what will it mean for you?

15 January 2018

Author: Claire McCloskey
Practice Area: Banking & Finance


What is Open Banking?

Open Banking arrived in the UK on Saturday 13th January, with relatively little fanfare for a directive that will usher in a profound change in the way we bank.

Open Banking is a UK-wide initiative introduced by the Competition and Markets Authority (the “CMA”), on foot of the revised European directive on payment services regulation, known as “PSD2”. The intention of Open Banking is to deliver a platform for greater competition and opportunity for customers within the banking and financial services sector.

How will Open Banking work?

Previously, a customer’s account information was only accessible by the customer themselves and their bank or lender.

Banks and financial services providers are now obliged to:

  • With a customer’s permission, allow approved third parties (including banks, technology groups and retailers) to access customers’ transactional current account data; and
  • Allow approved third parties to initiate payments directly from a person’s account.

The aim of enabling customers to share their data in a secure, standardised form with banks and third parties is to allow customers to compare products, initiate payments and request account information.

The data is shared via Application Programming Interfaces (“APIs”).

What is the purpose of Open Banking?

The CMA introduced Open Banking in order to increase competition and innovation amongst banks and lenders in the UK market. Research shows that UK-customers are averse to “shopping around” for best value, as well as to switching banks, however it is anticipated that Open Banking will radically change our attitudes to banking.

Nine UK banks are obliged to comply with the new rules - Barclays, Lloyds, Santander, Danske, HSBC, RBS, Bank of Ireland, Nationwide and AIBG. However, the scale of effort and resource required to achieve compliance cannot be understated and the majority of banks are not yet ready. Barclays, RBS, HSBC, Santander and Bank of Ireland have applied for and been granted an extension by the CMA.

How secure is Open Banking?

Customers’ information will be shared through APIs, which are trusted portals that allow information to be safely and easily exchanged. APIs are a tested technology - Uber and Deliveroo are two high-profile businesses which already rely upon APIs to deliver their services. Furthermore, banks will be legally required to use strong customer authentication which will allow the payment service provider to verify the identity of both the user and the service.

It is believed that Open Banking will be as secure as online banking, which offers little reassurance to those of us who are aware of the potential dangers attached to online banking and the well-publicised risk of fraud. Nonetheless, it remains to be seen whether Open Banking will be even as secure as that medium and it is beyond doubt that there any weakness in the system or process will be exploited by criminals.

How will Open Banking change the banking industry?

Commentators have predicted a variety of outcomes; ranging from an influx of new service providers and fresh products to an increase in bank transfer scams.

In reality, neither the benefits or risks of Open Banking are immediately obvious at this juncture. The consequences of its implementation are as yet unknown - although industry experts have made numerous and widely differing forecasts. Nonetheless, it is broadly agreed that the new rules will serve to disrupt one of the UK’s most ancient and traditional of industries and that they have the potential to revolutionise how you and I will bank.

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