Open Sesame!

One of the factors underpinning the fintech revolution, in the UK at least, is a key regulatory change, called Open Banking. Here’s some bluffer’s notes to what’s going on. Your guide: Rishi Dastidar.

So what’s the deal? “Open banking” sounds quite good.

Well, it certainly has the potential to be. Simply put, it’s a program to open up banking data in the UK.

Neat. How long has it been going on for?

It came into force in January 2018.

I sense an EU directive behind all of this, am I right?

You are. The catchily-named Payments Services Directive 2 (PSD2) is in part designed to try and create more competition in retail banking. The directive forces banks to share information about their customers with other licensed providers of financial services.

OK, so what’s actually going on here?

According to Open Banking, (1) the body set up by the Competition and Markets Authority on behalf of the UK government to implement the directive, the change “is designed to bring more competition and innovation to financial services.” Britain’s biggest banks, including HSBC, Barclays and RBS will, when asked, have to release data in a secure and standardized form, so that it can be shared between other approved organizations. Crucially, customers have to give their explicit consent that information about their accounts can be shared. As Open Banking says, the change “puts [the customer] in control of your data: an easier way to move, manage, and make more of your money.”

Data just wants to be free, huh?

Well, it has to be if we want there be innovation, greater competition and new services in consumerfocused financial services.

What data are being liberated?

Simple items for sure, like branch locations, but the real payload is the records of what we spend, what we lend and what we borrow – think about all the transactions that go through your current (checking) account on a regular basis. Banks have all of this good stuff, but don’t really do anything much with it, bar trying to cross-sell you some of their products.

So what good things will I soon be seeing?

Well, in theory, once third-party providers get their hands on this data, they can use it to start to create and develop new apps, new services… of course, as with all innovation, it’s difficult to truly predict what some bright spark will come up with presented with this mass of information. But broadly, you can expect money management to be easier (especially if you have different accounts with different banks), faster lending (especially for SMEs) and smoother payment solutions, that hopefully cut out the middlemen.

But does it mean the entire internet will know much I spend on takeaway pizza every week?

As if! If anything, you should expect services to actually be more secure than most of those that are currently provided. Only providers that are approved by the Financial Services Authority will be allowed to use the system, and those firms will have to use strong customer authentication, as mandated by law. But bear in mind: using an Open Banking service means you would only share your banking login with the bank – everything else happens behind the scenes.

OK, I’m sold. When does my life change?

Hold your horses. Truthfully, we just don’t know yet. What we do know is that there will be much clunkiness to begin with – integration and datasharing won’t be perfect straight off. And as The Economist reported in January 2019, “There is little sign of a stampede to switch banks.” But it’s a reasonable bet that the pace of innovation will pick up as more people start to see the potential and power in saying yes to allowing their data to move more freely.

1 — openbanking.org.uk