What’s Open Banking, and how does it work?

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what is open banking

Open banking has helped innovate financial services and improve customer financial planning and decision-making. But what exactly is it? We’ve got the answers. 

We'll discuss: 

What’s open banking?

Open banking is the sharing of financial data and services with third-parties like banks and financial services. 

You can share data like your bank account information and transaction history. Many financial services and products use open banking, and the process gives you more control over your financial information. 

Chances are you’ve been utilising open banking more than you think. Examples include: 

  • using a budgeting app
  • having all your bank accounts in one app
  • using a loan comparison platform

Is open banking safe? 

In the UK, open banking is a government-led service regulated by the Financial Conduct Authority (FCA), so it operates under strict security and privacy standards to protect your data. Companies can only access your information with your consent, and you can revoke it anytime. 

If you no longer want an app or website to access your data, you can either:

  1. tell the provider that you withdraw your permission
  2. or tell your bank that you no longer want that particular firm to have access.

Like any financial service, there are potential risks with open banking. Here are some precautions you can take:

  • only grant access to reputable and authorised third-party providers - if you’re unsure about a company, you can check whether it’s on the FCA Register or the Open Banking Directory. 
  • regularly monitor your financial transactions and accounts for any suspicious activities.
  • use strong, unique passwords and enable two-factor authentication where possible.
  • keep your devices and software updated with the latest security patches.

You can read more on how to stay safe online.

How does open banking work? 

Customer consent

Before any data is shared, you must explicitly provide consent for the third-party provider to access your data. 

API integration

Open banking allows you to share your financial data securely with third-parties through application programming interfaces (APIs). 

APIs basically allow two providers to ‘speak’ to each other, passing the information you've given permission to share. The APIs are built with strict security measures, such as encryption, to protect data during transmission.

Ongoing consent 

Open banking frameworks need regular reviewing and renewing of your consent for data access.

Open banking examples 

Viewing balances, transactions and spending habits

Thanks to open banking, you can view your account balances, transaction history and spending patterns across multiple banks in one place. 

Personal finance management apps

The idea behind these apps is to help you understand your financial habits better and make informed financial decisions. 

Apps like Money Dashboard, Emma and Snoop utilise open banking to analyse your financial data and offer personalised budgeting advice, spending insights and financial goal tracking. 

Direct payments

Open banking allows third-party providers to initiate payments directly from your bank account without using traditional payment methods like credit cards. 

Loan marketplaces

Using open banking, loan comparison platforms can access your financial data to assess your creditworthiness more accurately. 

The idea is that it can help you find loan offers that match your financial situation and needs.
Savings and investment apps

Apps like Plum, Moneybox and Wombat can use open banking to analyse your spending patterns and automatically move spare change or small amounts of money into savings or investment accounts. 

Credit scoring and underwriting

Credit scoring companies can use open banking data to build a more comprehensive and accurate credit profile. 

Similarly, insurers can look at your other financial information to help assess what insurance premium to offer you. 

Credit card and account switching

Thanks to open banking, people can change banks easier. By granting permission to a third-party provider, you can easily transfer your financial data to a new bank. 

Benefits of open banking     

Better customer experience

You can see all that’s going on with your finances immediately and find where needs most attention, meaning you get a better experience. 

It’s also easier to budget, shop around for the best deals and make payments quickly and easily from your bank or building society. 

Increased competition

Prior to the launch of open banking, smaller banks often didn’t get a look in against their larger competitors. 

Open banking promotes competition in the financial sector by allowing third-party providers to access customer financial data, meaning smaller providers have a better chance. 

Better risk management

Lenders can benefit from open banking by getting a better view of a customer's financial situation. 

Improved data can reduce the chances of customers who may struggle with repayments being offered unrealistic credit limits or loans.

Financial inclusion

Open banking has the potential to enhance inclusion by providing better access to financial services for all demographics, potentially bringing more people into a formal finance system.

Overall, open banking is there to give you a better financial experience. 

Whatever your plans, an Admiral loan could help