Open Banking: New rules that require banks to share information with third party providers come into effect. But what does it mean?
This weekend sees the launch of Open Banking, a new initiative that will force the UK’s nine largest banks (Barclays, Lloyds, HSBC, Santander, Nationwide, Danske Bank, Bank of Ireland and AIB) to give their customers more control over their data so they can share it with other financial institutions.
Essentially, Open Banking is a set of technologies and standards that allow third party providers to securely access personal bank details through APIs. This is a boon for innovative fintech providers and “challenger” banks and should allow customers to get better deals.
The government is calling it a “technological revolution” that will boost competition and aid consumers who can pick and choose from numerous different providers rather than taking all of their services from a single provider.
What is open banking?
Indeed, it is claimed the new rules, which come into force on Saturday 13 January, will save overdraft users an average of £180 a year and current account holders an average of £92.
It is part of a wider shake up in the banking industry that will make it easier to change banks and provide a framework for the shift to digital, mobile services. The Competitions and Markets Authority (CMA), which led the retail baking investigation, expects some benefits for small business banking too.
“For the first time innovative and secure apps will provide personalised services and information to cover all financial needs in one place, and make it easy for people to find out what bank account is best for them,” Alasdair Smith, chairman of the retail banking investigation, said last year.
“We’re also making banks send alerts to people about to slip into overdraft to help them try and avoid unnecessary charges. Banks receive £1.2 billion a year from unarranged overdraft charges. A new alert system, combined with our order to require them to publicly announce their maximum monthly charges, should mean significant savings in future for their hard-pressed customers.”
Needless to say, startups and fintech firms are enthusiastic about the launch.
“About time – Open Banking is an opportunity for financial services companies to actually improve things for consumers,” declared Jaidev Janardana, CEO of peer-to-peer lending firm Zopa. “We’re ready to go, and plan to launch our first feature on Monday.”
Thanks to Open Banking, Zopa will no longer require applicants to submit bank statements manually. Instead, Zopa will be able to access their information and make a lending decision instantly.
Traditional banks have been reacting too. Late last year, HSBC released a beta application in September that allows customers to see accounts all in one place – even if they are ones from a rival bank – and to see data-driven insights about spending. A commercial release is slated for next year.
It’s not all been plain sailing however. Five banks need additional time to comply with the rules although all should be on board by March.
There are also concerns that there could be an increase in security threats such as phishing scams and that the benefits could be difficult to convey to the general public.
“There are understandable anxieties about Open Banking being only of benefit to the digitally sophisticated: the young and the better-educated,” added the CMA’s Smith. “There’s a fear that some customer groups will get worse service as the banking system provides better services to the digitally enabled.
“That should not be so, because the benefits of Open Banking can and should extend beyond the digitally enabled: one can imagine a debt counsellor sitting down with a client, and, with permission of course, using the tools enabled by open APIs to give advice about how to avoid incurring overdraft charges.”