With our Open Banking Excellence (OBE) community expanding around the world, and in regions where Open Banking and Open Finance are newer and lesser-known concepts, we’ve decided to start this new series of articles that brings us ‘back to basics’.

We believe it’s crucial to explain to people how banking and finance are becoming more ‘open’, more ‘digital’ and more ‘technological’ – in simple, jargon-free terms. As Open Banking becomes a global phenomenon, we think the average consumer deserves to be empowered about their finances and how these changes impact them for the better. Knowledge really is power – a more informed consumer means less scepticism towards new technologies and products that are transforming the entire financial services sector. Which also means a higher adoption rate across the board. 

With this in mind, we begin our ‘back to basics’ journey answering the following FAQs:

• What is Open Banking?
• How does Open Banking work?
• Is Open Banking safe?
• What are the most common Open Banking use-cases?
• What about Open Banking adoption?

Let’s say you are out with a couple of friends for a few drinks on a Friday evening, after a tiring but productive week at work. One of them starts talking to you about, “That super handy app that aggregates all your bank accounts and financials in the same place”. You immediately reply: “I have it too. I love this app. It’s all about Open Banking-powered technology”. Given your knowledge of banking, another friend of the group exclaims: “Open Banking technology…what the hell is that?”. You pause for a few seconds, thinking about an easy answer…but is there an easy definition for Open Banking? Here we provide you with one:

Open Banking is a new financial service that allows regulated third-party providers to securely access your personal banking and other financial data if you – as the customer – give your consent to this practice.

Too many people around the world say they are ‘scared’ and ‘confused’ about Open Banking. It probably has to do with the word ‘Open’! Don’t worry, this is not a tactic to allow banks to sell their customers’ data more easily. The opposite is true: Open Banking has been conceived with the aim of improving financial services for people. By responsibly sharing customers’ transaction data, fintechs, incumbent banks and other types of financial institutions can start offering products and promoting financial behaviors that alleviate some of the pain points experienced by customers, especially low-income people.

Open Banking enables the average consumer to have more control over their banking and other financial data. In fact, Open Banking works only with customers’ consent as third-party providers need a customer’s explicit permission before accessing their data. If customers do not give consent, their data will not be shared. Also, it is important to mention that, once customers give consent, they can still stop sharing their data at any time.

By opening up access to data that have historically been ‘closed’ behind banks’ walled gardens, Open Banking allows new companies (usually tightly regulated third-party providers to keep consumers safe) to come to market and use this data in innovative and helpful ways. In particular, this helps those usually excluded from the financial system. With 1.7 billion adults worldwide still unbanked, Open Banking-powered services, such as products that analyse spending patterns or that responsibly extend access to credit, can indeed help the world’s poorest to improve their financial lives.

In the UK, Open Banking was born out of PSD2 and established by the Competition and Market Authority (CMA) to ‘open up’ the market to competition, and to stimulate the rapid growth of fintech. Arguably, and with hindsight, Open Banking was the incorrect name. This is the subject of industry debate and not one for here!

After having explained to your friends what Open Banking is, they look keen to know even more about these new banking services. One of them asks you: “Ok! That’s pretty cool…but how does it work?”. The answer isn’t overly straightforward for the non-techy amongst us, but let’s try:

Technically speaking, Open Banking relies on APIs (Application Programming Interfaces) which, in very simple terms, are connections between computers or between computer programmes. In other words, an API is a way of helping a software speak to another software. Think of sending a message via Facebook Messenger – APIs help your message on your device get to the other person’s. 

So far, the ‘opening up’ of banking data has focused on three broad areas:

• Account data (e.g., account holder’s name, account type, data the account was opened, transaction information, etc.)
• Product data (e.g., products and services a financial institution like a bank can offer)
• Payment initiation (e.g., making a payment from one bank account to another).

Thanks to connections created by APIs, if a consumer gives consent, a third-party provider receives the instructions for accessing their data from their bank.

 Your friends start getting intrigued by your explanation. However, one of them, a bit skeptical and worried about the idea of sharing his data, asks you: “But, is it really secure?”. This is one of the most classic FAQs when talking about Open Banking and you should know what to say.

Open Banking is secure. Essentially, as secure as ‘online banking’. A customer controls access to their financial data and aspects of data they want to share, along with, of course, who they want to share your data with. If you change your mind having given a provider permission to access your data, you can revoke your consent at any time.

To further improve a customer’s security, the industry is now moving toward more “tokenised” access, also known as “Open Authorisation” or “oAuth” connections. oAuth connections involve providing a third party with a “token” — a coded alternative to your bank account credentials that has no meaningful value if breached.

In regulated markets there are many procedures in place to protect you and your data against potential fraud and loss. In Europe and the UK, for example, third-party providers must be registered with a national regulatory agency to provide Open Banking-powered services. On top of being able to access and share a customer’s financial information with their consent, Open Banking providers also need to prove they meet security and fraud prevention procedures and meet minimum service level agreements.

Following your nice and precise answers, your friends look very interested now. All is starting to make sense for them. But then, after ordering another round of drinks, a new question is dropped on the table: “On top of the aggregation of data which can be done by apps like the one Sanj showed us before, when can we use Open Banking services?”. We’ve got you covered.

Open Banking-powered services are entering the market at a relatively fast pace. Three and a half years since the entry into force of Open Banking rules in the EU and the UK, some of the most common use-cases are the following:

• Smart onboarding: To inform and speed up various kinds of applications (from lending to renting), companies can instantly verify account ownership with your customer’s bank, without having to outsource or ask a user to manually upload documents. Examples of fintechs developing Open Banking-powered services are Credit Ladder, Zopa and Lendable.
• Payments solutions for businesses: With the payment initiation side of Open Banking, thanks to Open-Banking powered services provided by the likes of Token, GoCardless, Bottomline etc., businesses could use payment products that improve cash flow, lower costs, increase visibility and control and reduce fraud.
• Borrowing: If you don’t have much credit history, you could be prevented from getting favourable borrowing terms. But with Open Banking-powered services, such as the one developed by the likes of Credit Kudos, your historical bank account data can be accessed by lenders to help better demonstrate your creditworthiness.
• Personal Financial Management: By accessing your account data, Open Banking products, like the one developed by fintechs like MoneyHub Enterprises, Yolt, Money Dashboard, etc.) could analyse all the money coming into and going out of your accounts, helping you better identify problem areas and opportunities (e.g., lower fees, better interest).
• Account aggregation: Essentially, like the app showed to you by your friend (e.g., Plaid, Tink, Finicity etc.), Open Banking technology can enable you to see all your accounts in one place instead of having to log in to multiple different accounts in your web browser, or switch between multiple apps on your phone.

• Payments: Open Banking is a faster and easier way of making an online bank transfer. For example, if you use Wise, instead of going to your online banking in a separate window or on a different device, you can log into a secure page hosted by your bank and authorise a payment, without manually setting up a transfer.

…and finally…what about Open Banking adoption?

With your friends now a bit more aware of what Open Banking is, how it works and what main use cases have been developed for customers thus far, you decide to offer them a very last round of drinks using your new virtual debit card installed on your iPhone. One of your friends follows you to the bar and says, “Nobody, not even my bank, has ever told me anything clear about Open Banking. Is it really working? How many people are using Open Banking right now?”

Whilst waiting to order your last drinks you answer, “In the UK, which is probably the most advanced country when it comes to Open Banking, nearly 4 million customers are already using these new services. The market is growing relatively fast all around the world, not only in Europe, but there is still plenty to do. Customer trust, for example, is key for Open Banking to develop and be adopted widely. However, to win customers’ hearts and minds, the whole industry has to deal with two main issues:  

• Safety and security need to be properly addressed as a large number of customers globally perceive the sharing of data as one of the most sensitive forms of information;
• Customers like you and I need to be better informed and taught about what Open Banking is, what we can do with it and how it can really become a secure friend of ours”.

Did you enjoy this article?  Then you maybe also finding useful my article on “Open Banking is going global” from the same Back to basic series.

Helen Child, Founder & CEO, Open Banking Excellence