What is Open Banking?

Most of us will have heard of the term Open Banking and may have noticed an increase in financial apps and services in the past couple of years. But you might be wondering what exactly is Open Banking, what are Open Banking loans, and how Open Banking even works? Well, we’ve taken a closer look at what Open Banking is and what it means to consumers like you.

What is Open Banking?

Open Banking is the catch-all term used to describe a series of regulatory changes that require banks to allow their customers to share their financial information with third-party providers if they give their permission. In other words, you can now permit a budgeting app or lender to access your bank account information directly and use that information to improve the service it provides to you.

What is an Open Banking API?

An API, which stands for application programming interface, is like a bridge that connects different software systems so they can share and exchange data. This helps different programs work together by letting them use the same information, even if they usually keep their data separate.

Open Banking APIs let people link their bank accounts to different financial services. They've opened up a whole new world of data access by allowing lots of apps and innovative financial services to be created using safe and secure connections to data that users have allowed access to. Banks are using these APIs more and more to safely share user data with apps and services.

When did open banking start?

The changes came into force in January 2018 following pressure from the Competition and Markets Authority (CMA), the CMA wanted more competition within the personal finance sector and also wanted to stimulate growth in the financial technology industry to help provide better products for consumers.

The COVID-19 pandemic also created new problems that needed solving by the personal finance industry. Fewer consumers are willing to visit branches in person to do their banking, and during national lockdowns, which reached across the world, we were actively prevented from banking in person, further increasing the demand for online banking and finance services.

These changes are likely to be permanent and the finance industry has to respond with greater flexibility and ingenuity than before. And on the whole, it’s working!

How can Open Banking benefit consumers?

There are several ways in which you, as a consumer, can enjoy the benefits of Open Banking. Here are some of the main advantages:

Better understanding of your financial data

If you’ve downloaded a budgeting app recently or started using an online savings tool or some new accounting software, for example, you may have noticed the option to view all your financial data in one place. Many online financial tools can now access your current account information directly from your bank.

This information used to be kept out of reach, even from banking customers themselves (remember having to ring up or drop into a branch to find out your balance?). Those days are now over and we can all view our real-time financial data on our mobile devices whenever we choose.

Open Banking can enable you to understand your financial position more clearly, helping to better inform your financial decisions. It allows you to view all your financial data in one place, with access to tools that could aggregate your accounts to show you exactly where you are financially.

Creates a more competitive marketplace for consumers

Can you remember the days when opening a bank account came with very few choices? There were four or five high street banks that took everyone’s money and most people simply opted for the banking giant their parents had always trusted. Things started to change for the better after the 2008 economic crash when we all began to question the status quo and ‘challenger banks’ appeared on high streets, in supermarkets and, of course, online. Since then, Open Banking has widened the marketplace even further with online-only accounts becoming the go-to option for many younger consumers.

Managing your cash online can carry major benefits, providing you with services such as transfers and payments at the click of a button. There’s little need to ever visit a branch these days and Open Banking means a greater number of online-only accounts are on offer for you to choose from. And more account competition means better rates and terms for consumers.

As well as doing your banking online, the Open Banking revolution has also given birth to a vast array of financial technology tools that help you to do everything from budgeting and tracking payments to saving and accounting. You can use apps that will round up the small change from your card payments and put it into a savings account for you. Some tools will help you track every last payment you make and deliver in-depth reports showing you where your money goes each week, month or year. You can even run your small business accounts through an app on your phone if you are a freelancer. The possibilities are endless.

Increases consumer financial knowledge

Open Banking has produced a large number of online tools created by innovative fintechs, which often help to generate a better level of financial understanding among users. For example, an app called Moneyhub gives users an overview of their current accounts, credit cards, loans and savings. Everything is in one place and the app also provides access to Independent Financial Advisors that can further advise users on important decisions such as pensions and investments.

Easy access to tools like these, which are easy to set up and use, provide a new level of control and understanding among consumers that they would have previously struggled to obtain. Before Open Banking, this level of insight was, perhaps, reserved for those of high net worth, who could pay a premium for a meeting with an IFA who could take them through the ins and outs of the personal finance options available to them. Now, this type of tool is available at little or no cost and can help to educate and inform consumers like never before.

So, if you’ve got queries about Open Banking and what they can see, there’s no need to be concerned. You’ll simply need to establish whether they are registered with the Financial Conduct Authority (FCA) before opting to share your information. The Open Banking regulations state that your bank will protect you if the third party accessing your information is authorised by the FCA, so it is essential to check.

Applying for loans is quicker and easier

Some lenders are now relying on Open Banking information to assess borrowers and their applications. Instead of having to base lending decisions on potentially outdated information provided by borrowers about their income and financial status, Open Banking allows lenders to access applicants’ information directly and make their assessments based on real-time data.

Borrowers have to opt-in to have their data accessed and used like this and, as a borrower, you must exercise caution when deciding with whom to share your personal financial information. This brings us to the topic of loans that use Open Banking, and more specifically Open Banking payday loans.

Open Banking has the potential to significantly simplify and expedite the loan application process for consumers. In fact, as authorised and regulated direct lenders, Moneyboat are in the process of giving our customers this option to see if it will help with their loan application.

In conclusion, caution is needed but the advantages are clear

With any major shift in regulation and data protection laws, security concerns do arise. Some are concerned that Open Banking will present problems from a privacy perspective. However, it is up to consumers to decide whether they want to allow third-party fintechs to access their account information.

Overall, though, we believe that Open Banking is an exceptionally positive change to regulation for consumers looking to get the best deals and access tools to help them keep an eye on their finances. Although the changes to regulations are no longer brand new, the financial freedoms Open Banking is creating are still developing as more and more consumers download apps that can change their financial lives forever. In addition, fintechs are constantly springing up and innovating to stay current and relevant. Typically, these fintechs are far more agile than traditional high street banks ever were and it’s us, as consumers, who get to reap the benefits of their cutting-edge creativity.

Like never before, we have oversight of our own financial lives, tipping the balance of power back in favour of the consumer.