Open Banking has the potential to disrupt the financial services sector. But what is Open Banking and what changes will it bring? In this article we explore what Open Banking really means, its potential for the banking industry as a whole and the opportunities and challenges for fintech firms, banks, small businesses and consumers.
What is Open Banking?
Open Banking refers to an open source technology that allows anyone to create apps and websites for the financial services sector. Developers use an application programme interface (API) to create software that allows customer data to be shared securely between banks and trusted third parties – with the customer's consent.
What is the Open Banking Standard?
An open standard is used in the development of software as a guideline to keep the technology open and operating in a standard way. The Open Banking Standard governs how data can be created, gathered, shared and used by banks and third parties.
The Open Banking Standard is publically available and can be accessed by developers when creating apps and websites. The final version of the Open Banking Standard is due to be in use by 2019.
Why was Open Banking developed?
Open Banking was developed to address concerns over a lack of competition within the banking industry. A small number of banks are responsible for the finances of millions of customers across the UK and Europe. UK and European authorities identified this monopoly as a barrier to competition in the industry.
In the UK, the Competition and Markets Authority (CMA) called for an 'Open Banking revolution' that would benefit customers and small businesses. The Open Banking Working Group (OBWG) was set up to work with banks and fintech businesses to develop the underlying APIs, security and messaging standards for Open Banking to operate.
The EU is tackling the same problem with the second Payment Services Directive (PSD2).
Examples of Open Banking apps
New businesses with innovative ideas for Open Banking apps are entering the market and competing with banks for their customers. Commentators predict an explosion in the number and variety of banking products and services available to consumers. Below are some examples:
- Yolt is a money management app owned by ING Bank and launched in beta format in June 2017. The app collates consumer finance data in an easily accessible format. Yolt allows users to view all their bank accounts, credit cards, bills etc. in one place – even if they are from different providers. Users can compare prices, including energy prices, and set budgets on their phone.
- HSBC announced in September 2017 that it was testing an Open Banking platform that will allow its customers to view their current accounts, credit cards, loans, mortgages and savings from up to 21 different providers. The aim is to eventually provide features such as Safe Balance, which shows how much disposable money a customer has before pay day; Spend Analysis, which categorises spending; Digital Coach, which will provide tips on money management; and Savings Rules, which will round up spending to put the extra into a savings account.
- Wave offers a service for businesses to give clients access to all of their finances in one place. It acts as an invoicing service; tracks income and expenses to make accounting easier; allows for streamlined payment of staff and will leverage data from as many sources as possible. It also offers loans to clients by connecting with the online lender OnDeck.
- DueDil is an app which uses data to make online due diligence passports for its clients so that they can prove their financial credentials. Open Banking will allow it to include banking data to provide up-to-date financial health indicators.
- Tandem collects the banking data of its customers from their banks, analyses their spending habits and provides suggestions for how they can save money.
Open Banking opportunities
Open Banking will bring opportunities to consumers, small businesses, fintech firms and banks.
- Consumers: Open Banking offers a number of advantages to the consumer. An increase in competition in the banking industry is expected to drive down the costs of services. Developers are creating apps that will give consumers a clearer idea of their finances and where they can make savings. Consumers will have a greater choice of banking services and an easy way to compare the services on offer. Consumers will also have ultimate discretion over how their data is used (supplemented by the GDPR), so that their data is used to work for them, such as to facilitate the transfer of their funds.
- Small businesses: Equivalent products are also being developed for small businesses so that, for example, accounting software can link to their bank accounts to reduce unnecessary administration.
- Fintech firms: Open Banking supports the country's burgeoning fintech industry by creating a more level platform for smaller firms to compete. Many smaller fintech firms sense an opportunity to take an increasing share of the market from traditional banks, using easily accessible customer data to create innovative products. Banks may have greater consumer trust, but fintech firms can better connect with the modern consumer through well-designed apps. It's also easier for smaller firms to adapt their systems to target consumer trends.
- Banks: Some commentators have seen Open Banking as heralding the end of traditional banks' monopoly over banking services. Nevertheless, traditional banks approach Open Banking from a position of strength. The majority of today's customers trust their banks to manage their financial data and banks have resources far exceeding those of their fintech rivals. If a bank were to develop a popular app to give customers access to their accounts across all of their banks, the bank would have greater control over the financial data of consumers than their rivals. Many banks have partnered with fintech firms to produce innovative products for consumers. On a more practical level, any technology that enables banks to have greater visibility over a customer's financial position will be of great assistance when agreeing consumer loans and mortgages.
Open Banking challenges
Since the idea of Open Banking first arose, there has been much finger pointing and naysaying around the challenges Open Banking will face. With an aging population and a large proportion of the population deemed ‘digitally illiterate’, could the apps and technology driving Open Banking be a damp squib?
There are questions around whether fintech rivals will be able to develop the level of consumer trust enjoyed by traditional banks. Many parties have high expectations of a digital revolution in banking; the risk is that the ultimate result is little change from current practice.
Additionally, banks have voiced privacy and data protection concerns when sharing customer data with unknown third parties. The more financial data is shared, the more likely it is that data is passed to fraudulent firms, resulting in a loss of customer trust.
The idea of sharing consumer data appears to contradict the new protections and increased privacy given to individuals under the General Data Protection Regulation (GDPR). Fintech firms, on the other hand, have argued that petitioning by banks has seen the dilution of Open Banking so that Open Banking is no longer quite so open.
Open Banking and PSD2
Under PSD2 financial institutions are required to provide third party access to their account holder's data. PSD2 is a far wider piece of legislation than the CMA’s Open Banking package. Whereas the CMA’s package focuses purely on personal and business current accounts, PSD2 covers all payment accounts.
PSD2 is due to come into effect in the UK in January 2018. The CMA package requiring banks to allow third party access will also come into effect in January 2018.
PSD2 does not require there to be an open standard, as has been created in the UK, but will instead act as the legal framework within which Open Banking will have to operate and comply. It is anticipated that Open Banking will in due course be expanded to apply to other bank accounts in line PSD2.
Read: Understanding the new Payment Services Regulations
How can Burges Salmon help?
We have an established fintech practice. Our team offers legal and commercial advice, drawing on our knowledge of the sector to help you. If you have any questions on the matters discussed in this article, please contact your usual Burges Salmon lawyer.
This article was written by Guinevere Wentworth and Alex Gillespie