What is Open Banking?

By now, most of us will have heard of Open Banking and may have noticed an increase in financial apps and services in the past couple of years. Open Banking allows users to safely share financial data with authorised third-party providers to give them access to better tools and financial products. But what does Open Banking show with this data?

To help you gain a clearer understanding of what Open Baking is, we’ve explored how it works, what it can offer users, and safety precautions to help protect your data.

In this guide: 

• What is Open Banking? 
• How does Open Banking work?  
• Is Open Banking safe?
• How can Open Banking benefit consumers? 

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, with their permission. In other words, Open Banking allows helpful budgeting apps and direct lenders to access your bank account information directly and use that information to improve the service provided to you.

How does Open Banking work?

Open Banking lets you securely share your financial data with trusted apps and services, giving you better control over your money. You can view all your accounts in one place, making it easy to track spending, manage budgets, and improve your financial planning.

It can also simplify the process of applying for loans and mortgages, as lenders can quickly verify your financial history and speed up the approval process. Open Banking can be helpful for businesses too, automating tasks such as cash flow management.

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 enabling the introduction of innovative apps and financial services using safe and secure data connections. Banks are increasingly turning to APIs as a trusted way to share user data safely.

Is Open Banking safe?

It’s natural to worry about your financial information being shared, but Open Banking is safe. For instance, only companies authorised by the Financial Conduct Authority (FCA) can access your data (and this is only with your permission).

That being said, it’s important to be cautious. Always check the provider is FCA authorised (on the Open Banking Directory or the FCA Register) and never share your data if something feels wrong.

It’s also important to remember that if at any point you change your mind, you’re free to withdraw your consent. To do this, you’ll either need to visit the service provider’s website or change your preferences directly in your banking app.

How can Open Banking benefit consumers?

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

1. Better understanding of your financial data

If you’ve downloaded a budgeting app recently or started using an online savings tool or accounting software, 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 check your balance?). Those days are over, and we can all view our accounts and financial data on our mobiles whenever we choose.

Open Banking can help you understand your financial position more clearly, helping to 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.

2. 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 and most people simply opted for whichever bank their parents had always trusted.

Following the 2008 economic crash, things started to change for the better 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. 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 rise to an array of financial tools and services. The possibilities are endless, but here are just a few highlights:

• Apps can help you to do everything from budgeting and tracking payments to saving and accounting.
• Round up the small change from your card payments and put it into a savings account for you.
• Some tools will help you track all your transactions 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’re a freelancer.
  

3. Increases consumer financial knowledge

Open Banking has produced a range of online tools created by innovative fintechs, which often help to boost 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 (IFA) who can support users with important decisions such as pensions and investments.

Access to tools like these, which are easy to set up and use, provides 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. As mentioned, you’ll simply need to establish whether they’re 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’s essential to check.

4. 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 for their data to be 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 can significantly simplify and expedite the loan application process for consumers.

As a responsible and authorised short-term loan direct lender, when you apply for a loan with Moneyboat, we’ll give you the choice to opt into Open Banking to help us gain a better understanding of your financial situation. That way, we can offer personalised solutions based on your requirements.

Key takeaways: Caution is wise, but the advantages are clear

With any major shift in regulation and data protection laws, security concerns do arise. Some people may be concerned that Open Banking could present privacy issues. However, it’s up to consumers to decide whether they want to allow third-party fintechs to access their account information.

Overall, Open Banking is a positive change for consumers looking to access the best deals and tools to help them manage their finances. Although the changes to regulations are no longer brand new, the financial freedom Open Banking offers will change how we manage our money forever. Users have more insight into their financial lives than ever before, tipping the balance of power back in favour of the consumer.

Explore more helpful resources

Now that you know more about Open Banking and how it works, why not head over to the Moneyboat blog for more insights? There you can read about the different payment methods in the UK, or explore our handy finance jargon dictionary filled with terms and acronyms to help you brush up on your financial knowledge.

Finally, if you’re experiencing financial stress or searching for expert advice, support is available from organisations like StepChange, Citizens Advice and MoneyHelper.