Open Banking: the Hows, Whys and Whats Explained

Open Banking changes the way we interact with banks. In January 2020, Open Banking Directory published the results of a research that Open Up 2020 Challenge conducted. According to the research, nearly 27 million British citizens made a New Year’s resolution to save money. But that is often easier said than done.

There are new innovative apps that help you keep track of your finances. These apps monitor your spending from Starbuck to your local corner shop. So it’s easier to manage the way you spend your money and improve your savings. But how does third-party providers (TPP) like these budgeting apps get access to your bank account details?

With the help of Open Banking, of course.

In the UK, there are regulations for banks to share information with authorised TPPs.

Nearly 27 million British people made a New Year’s resolution to save money this year.

What exactly is Open Banking?

Open Banking is an initiative that the Competition and Markets Authority (CMA) put forward. Under it, TPPs and account providers can get direct access to your banking information.

But your bank can’t just give out your financial data. There is a layer of security when you use Open Banking. This is due to the revised Payment Services Directive (PSD 2). The regulation makes payment services that are safer.

Banks can only share your financial information with your consent. Authorised TPPS and account providers get access to your spending habits, payment patterns and other details. The Financial Conduct Authority (FCA) or its European equivalents regulate these providers.

At the moment, Open Banking is only possible for current accounts with online access. However, down the line, you can share information from your savings and other payment accounts.

Authorised TPPS and account providers get access to your spending habits, payment patterns and other details. The Financial Conduct Authority (FCA) or its European equivalents regulate these providers.

What are the advantages of Open Banking?

Open Banking has a lot of potentials. One of its most attractive possibilities is aggregation. If you have multiple accounts in different banks, you can sign up with a provider who offers an app that displays all banking details in one place.

There are also apps that track your spending habits. Subscribing to one such app can tell you how you spend your money. These apps can analyse your payments and purchases. Thus, you can discover where you can cut back on unnecessary spending. Some apps can even recommend a better credit card or savings account. They can even help you select better investment options. Improving your credit scores also allows you access to better products.

The most common ways for providers to access your data at present is by ‘screen scraping’. That is, when you use an app, you provide your login information – username and password. The app can then select the information the provider needs. This is not a truly secure option.

That is why app developers are now shifting to Application Programming Interfaces (APIs). With APIs, providers can access your data directly. In simple terms, your information like credit and transaction history is shared with the provider. With Open Banking, TPPs and account providers will use APIs to access your financial data.

Since regulations are in place, your data will still remain secure.