Open Banking, will it change short term loans?
What is Open Banking? Open Banking is a UK first as a government regulator decided banks were not competitive. The banks are being forced to be more competitive by enabling your data to be accessible and portable. Open Banking is the result of work done by the Competition and Markets Authority (CMA) in the UK. It’s a number of reforms and changes to rules that deal with how the banks provide financial information. In parallel, a new set of regulations called PSD2 or the second Payment Services Directive have also come into force.
The purpose of the new rules is to make the banks work for you and deliver on promises of real competition. With more data available and simpler payment processes, it may change the way lenders provide short term loans and payday loans. There might be more access requested to your bank account to prove the loan is affordable or maybe just simpler ways to pay off debt.
So what is Open Banking
In simple terms, it’s a set of rules that forces all UK regulated banks to allow you to share your data. This data includes more than just your account details and balance, it includes your spending habits, companies you use and regular payments you make. This will always be with your permission so don’t worry about anyone snooping. The rules are designed to allow you to be in more control of your finances and the data the banks hold.
To do this, the banks signed up to a set of standards covered by the Open Banking initiative. Those standards tell the banks how and when to share data and what that data should look like. The most important part is that the data is in a format that can be read by other banks or financial services. This allows both banks and other financial services companies to exchange data and be more flexible in moving your details about.
Only regulated companies will be allowed to access your data and they’ll need to prove they can do it securely before being approved.
How does Open Banking work?
The new Open Banking rules are pretty strict on how it works to make sure it is always with your permission and secure.
- 1. A bank or authorised company will ask you for consent to access your records from the bank. This might be through an app on your phone or computer or a website.
- 2. If you choose to agree, you’ll be redirected to your bank’s own website or app to grant approval to the request. You’ll be asked to login to your bank to prove who you are.
- 3. You’ll return to the app or website with the 3rd party and proceed with the service.
The whole process has been designed with your consent at the heart of it, you will never be forced to share information but agreeing to it might be pivotal to new services being offered.
How will Open Banking change things?
In every other aspect of your life, sharing data has improved things (and brought a few risks). Think about your car insurance, maybe you remember the process before the web comparison sites. You had to ring each insurer and get their quote. You answered the same questions over and over again so in reality, most people just kept insuring with the same company. This meant that the company didn’t need to keep it’s prices low as you probably wouldn’t change.
With the internet and data sharing, web comparison sites came along. They changed everything by taking your details and sending them to dozens if not hundreds of insurers and showing you the best prices. Then you could just click a link, fill in a few more details and you’d move insurer.
What is Open Banking going to do for bank accounts? Imagine a bank account comparison site that showed you available accounts side by side. Just like the insurance sites, you could click a button and the process would start (with your consent) moving your account.
What does this mean for Short Term Loans?
We think it’s really exciting as it could make the process of assessing the affordability of loans much simpler. No more digging out bank statements and uploading ID checks.
When a lender lends, they’ll have an app you can install on your phone. You could agree to share your bank account records and they will suggest how much you can afford. With this kind of access they can agree on the spot. Sign the loan agreement in the app and the same app could send the money to you then and there!
When you have some spare cash to repay the loan, you could log into the app and confirm the amount to repay and transfer it straight away changing the amount to suit your expenses.
We’re looking into developing an app right now so expect more soon on progress.
How do I stay safe?
You should make sure any app or website you use has been regulated to protect you from fraud. There’s not much stopping unscrupulous companies requesting consent to access your data and then doing whatever they want with it. The regulation protects you in case anything happens to your money and the bank will protect your transactions. Always check a provider before you give it access to your accounts. You can do this by checking they are on the FCA Register. If it’s not authorised, ask what security measures it has in place.
If you’re happy with a provider you can choose to give it access even if it’s not authorised. As long as you’re aware of the extra risks, you can trust the big brands.
It might take some time until all providers are regulated so there is a transition period. In that phase, a provider doesn’t need to be authorised to connect to your accounts. Be extra vigilant in the early days.
If you’ve already given a provider consent and it’s not authorised, you can carry on using it. It won’t be any more risky than currently but you won’t be protected by the extra rules. Once they’re authorised, you’ll have the full protection so only continue if you’re happy with the risks.