So, what is open banking? It is a revolutionary development in the world of personal finance management. In this blog we will be explaining the concept of open banking for you, we will detail the positives of this new development and what the benefits might be for the end user/the average consumer.
Open Banking – A Definition
Open banking refers to a new set of guidelines that are designed to allow for an individual to share securely data and information regarding their personal finances with external companies or businesses. The guidelines in question pertain to the big banks and building societies who, under the rules of open banking, must allow their customers a safe way of communicating this data to third parties. These rules were introduced in January of 2018 by the CMA (Competition and Markets Authority) which was acting on behalf of the British government. It is an extremely exciting development that does actually have the established order of finance management, as well as the legacy banks, somewhat concerned! Currently, the nine biggest banks and building societies have opted in to open banking, with other banks/building societies making plans to join as well. In the next few years, inclusion into the open banking system could very well be the norm.
What Data Can You Share?
Firstly, it is important to underline the fact that you need to opt-in to open banking as banks cannot subscribe you without your consent. The more data you do decide to share, or the more open you are with your banking/personal finance the more tailored your service can be! (This is the theory at least). So, what data can you share? The limit is generally without a limit and you are able to share any and all data, such as:
- Your transaction (and historical transactional data)
- Your spending habits, including everyday spending/day-to-day spending
- Your regular payments, including standing orders, direct debits, debt repayments etc
- The bank accounts that you have, including credit cards, savings accounts and ISAs et al (as well as affiliate services or finance products)
Once you are on and subscribed to the open banking system, the companies and business (all external third parties who are FCA regulated and who are also subscribed) can then offer and recommend a range of different products to you. These include, but are certainly not limited to:
- Money saving or finance-themed apps/software
- Bank accounts/providers
- Credit cards, loans, or ISAs
The main benefit of this system is that it can save the consumer money on their finances and can also help them to manage their personal finances better; essentially enhancing their experience with finance apps and money in general. Of course, speaking in terms of the industry, it can (and most likely will in the not-so-distant future) create massive competition between banks. The idea is that because external companies can offer their services (companies that are less restricted and more focused on user experience and technological advancements) banks will move quickly in order to progress their own technology and service proposition(s) so that these external companies don’t steal their customers. At the very least we are certain that open banking will bring more innovation into the sector.
An Example Of Open Banking In Practice
What follows is an example of open banking in practice, please do take this with a pinch of salt as actually applications of open banking may differ in the future:
You subscribe to open banking and a registered third party offers you the chance to download an app that connects to your bank account. This app can interpret and then analyse all the data that is generated as a result of your use of this bank account. The app then takes this data, and suggests ways in which you can save money, cut out unnecessary expenses, either by way of a suggested change in spending habits or by suggesting a savings account, or something similar – or both! It is able to go one step further: the app could then also be able to actually take money from your account and deposit this into your savings account. The limits and potential of open banking is literally endless. Owing to the large streams of data that could be made available if enough people sign up to open banking the leaps and advancements in technology could be tremendous. It would likely make use of open APIs, which developers can utilise easily in research and development.
What Are The Other Benefits Of Open Banking?
As mentioned previously, the benefits of open banking are huge. We will breakdown for you the current benefits of open banking:
- Banks are very likely to rush to improve their services, including the technology that is associated with their services. They may also alter a lot of the traditional operations that define the legacy banks, in favour of newer more modern, consumer-focused operations.
- On the same vein, third parties are likely to develop a range of new tools and applications that are designed specifically to enhance the usability of their programs. Better methods of money management are likely to emerge. More people may end up using legacy banks as a secondary source and using banking apps like Monzo as their primary method of banking.
- Borrowing, and acquiring credit in general either as a business or as a personal loanee will in all likelihood be much, much simpler. This is because all of the data and information that a lender needs is accessible in a heartbeat. They will also be able to analyse data from multiple sources all at once.
- New apps may also be able to help a massive amount of people manage their money in better ways. The scope of effect could also be tremendous, apps could help customers to cut unnecessary expenses, as well as removing direct debits and subscriptions that they aren’t using.