Article by Jamie Mackenzie Smith - 15th January 2018

Your Guide To Open Banking

On 13 January, the UK banks embarked upon arguably one of the biggest changes to personal finances since the introduction of computers. Open Banking aims to make it easier for banks, lenders and consumers to access and share information, with a view to creating new products and opportunities through innovation and increased competition.

The UK’s biggest banks had been given the mid-January deadline to facilitate access to certain types of data, following a year of collaboration and development.

Behind the scenes there’s been a lot more to it than that, involving the way your personal data is handled and distributed, making sure that your data is secure at all times.

How does Open Banking work?

Open Banking takes the tried and tested principles of data sharing to assess your information and put it before banks, lenders and prospective companies. In theory it should make the process of switching accounts and applying for products that bit faster, as all your information is available for the bank or lender to view.

Example:

Say you’re shopping around for a mortgage. Unless you're signed up to Open Banking, you’ll have to fill in all your personal information, provide proof of income and potentially have to pass further checks for each mortgage lender you approach. With Open Banking, this information could be available for lenders to see at the press of a button (as long as you have given permission), so you’re not having to provide the same details over and over. This not only saves you time, but will cut down on the processing time taken by the lender.

A particular aim of the initial launch is to make it easier to switch current accounts, with the average account switch rate at around 3%, according to the CMA.

According to the EU Commission, benefits for consumers include:

  • Eliminating surcharges like booking fees on most card payments
  • 8 weeks unconditional refunds on direct debits
  • Reduced costs to customers in the event of fraudulent transactions
  • Better protection from more secure payments

This also paves the way for new money apps to open up. The full potential of Open Banking isn’t likely to be realised for a couple of years, partially due to the fact that app makers still need to experiment with the platform, but also because it is launching with some limitations in place to keep it easy to maintain. Initially the service will only assess data from current accounts, but other products are likely to benefit from Open Banking’s functionality in the future as more people, companies and start-ups adopt the platform.

What if I don’t want my personal information shared?

That’s fine too - you have to opt in to Open Banking, rather than opt out. If you choose to use any money-managing apps, they may prompt you to grant permission for them to access your information via the initiative.

You can also opt out whenever you like, but you will probably lose any app functionality that involves your financial information in doing so. On top of that, you’ll need to re-confirm your authorisation every three months, preventing unused apps from making payments or accessing your information without your consent.

Are there any drawbacks?

It’s difficult to say initially until Open Banking has been around for a bit longer, what issues will be faced in its early days; that’s not to say the finances of early adopters are in danger, but speculatively, things are rarely perfect on launch.

As with any new system, it’s likely that there will be issues to sort out, such as compatibility issues between specific apps and lenders, as well as security and verification teething issues. In fact, five out of nine banks signed up won’t be ready for the 13th of January launch due to issues getting it to work with their system, so you may not be able to use it right away.

Inevitably, this ease of accessing user information will be used by companies to make it easier for them to market new products to individuals and as some consumers might find the extra knowledge unnerving. Better product targeting isn't necessarily a bad thing, but it does present yet another way for your own data to be used. It just means as ever, it’s worth doing your homework before making any big commitments.

Really, it can be viewed as a two-way street: it’s easier for you to find deals and apply for credit, but it will mean giving consent to share more of your personal information.

How is it regulated?

All companies that want to take part in Open Banking need to be authorised by the FCA to ensure that consumers are treated fairly. Security will be at the forefront of developments too, as those involved seek to overcome natural consumer concerns. Given that a driving desire behind the initiative is to encourage innovation - particularly amongst start-ups, it's important that over-regulation doesn't itself become a barrier to participation.

Open Banking has come about to comply with a European-led legislation to enhance customer protection, while encouraging competition between companies called Second Payment Services Directive (PSD2).

Ultimately, data security is at the heart of Open Banking, which is why it has to be so heavily regulated. But as with anything 'new', consumer trust and engagement won't be universally forthcoming from day one.

In summary

Open Banking is still very much in its infancy and its full powers and usefulness are probably a couple of years away from being realised. As more and more people and companies start to adopt the system, it’s only natural it will grow and change to adapt to this.

There are undoubtedly going to be some exciting developments that change the way we think about finance, but we also shouldn’t expect to see them happen overnight.

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