In this guide, our intention is to outline for what open banking is, as well as what you need to know about this development, as an average consumer. We will also expand upon this new system of working and what its long term implications are for the banking and finance industries. Lastly, we’ll be explaining in some detail what the benefits of open banking are and what you can expect regarding innovations and effects to you and the management of your personal finances.
What Is Open Banking?
Open banking was introduced in January 2018 by the Competition and Markets Authority, itself acting as a proxy on behalf of the government. It was hailed as a revolutionary feature of modern banking that would shake up the established order! But what exactly is open banking? It refers to a set of new rules that were implemented which requires the big banks and building societies to offer individuals a safe and secure method of sharing their personal financial data and transaction information with third-party organisations and companies. At the time of writing the nine biggest banks and building societies are enrolled with plans to secure the participation of more companies/banks onto the programme. This data can include such things as:
- Your spending habits
- Payments that you make regularly (standing orders, direct debits)
- The companies that you use for your banking needs, credit cards, or savings accounts
Once you have provided your permission/consent the third party organisations who are also signed up to the open banking programme will be allowed to offer you the chance – whilst also highlighting the benefits of – using other banks, budgeting apps and much more besides. The ultimate goal is to save the consumer money whilst also helping them learn long-term money management skills via apps and/or new products. In addition, open banking was put into place to create more competition between banks and financial institutions, with the hope that this in turn will precipitate innovation and technological advancements in the sector.
What follows is an example of open banking in practice, for the consumer:
- A third-party company equips your bank/current account with an app or a piece of software (or links said app/software to your bank account) that actively analyses your spending habits, direct debits etc. It then offers you advice regarding your spending and saving money. It could also recommend you new products such as a credit card or a savings account, for example. The general idea around such software (for the consumer) is to improve everyday handling of personal finances, inclusive of usability and user experience. A perfect example of this would be the application “Plum”, a bot that is reachable via Facebook Messenger! You can click here to learn more about Plum.
It is important to make note of this next point: you do not have to give access to your data should this not be of interest to you, or if, for whatever reason you do not want to share your personal financial data with third parties.
So What Exactly Can You Expect From Open Banking?
An Improved Service From Banks: Open banking will inevitably put a lot of pressure on the legacy banks. This is because open banking (by way of usership) could in time lead and/or guide customers towards more modern banks who have a more consumer-focused way of operating, or favourable terms and conditions, or both. This pressure could force the big banks to improve their services, adding new features whilst also modernising their proposition(s) to compete with the newer banks/apps/software available via open banking.
Improved Tools And Features From Third Parties: With the increased openness and transparency of data channels (and open APIs – the means by which data is shared), app developers and those in control of the development of applicable third party software will have greater scope to develop more useful tools and features for consumers to use. This may also give rise to new apps that are able to offer consumers more proficient methods of money management, as well as new ways of saving and budgeting.
Simpler Borrowing And Credit Acquisition: At present, the process for assessing an application (for a lender) can be time-consuming and involve a lot of paperwork and admin time, and can also involve pooling data from a variety of sources/locations. With open banking, a lender can simply ascertain all of the information that they need using the “open” nature of the information channels, and because a potential loanee will have facilitated full transparency regarding all of their financial data.
Bank Loans Can Be Easier To Ascertain: The details of this point are similar to the above, with open banking, instead of submitting or having lenders analyse masses of data (such as business reports which can sometimes quickly become inaccurate or out of date) the lender can simply pull all the information that they require simultaneously from your bank, credit card supplier and/or the accounting system(s) that you use.
Fight Fraudulent Transactions: The advancements in software may well be employed in the future to protect consumers against credit card theft and/or identity fraud.
Save Money By Removing Unnecessary Subscriptions And Expenditure: A final (but by no means last in the terms of the actual scope of open banking) point regarding the potential benefits is that it may give rise to software that can help to highlight unnecessary monthly subscriptions that you are perhaps not using, or that you could be paying less for.
Open banking has got a lot of people, companies and affiliate fin-tech businesses extremely excited for the future of banking and of personal finance management – and for good reason!
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