Open Banking: An Introduction

This informal CPD article on Open Banking: An Introduction was provided by CFTE (Centre for Finance, Technology and Entrepreneurship), an education platform that aims to address the needs of financial professionals to upskill in a rapidly changing industry being transformed by emerging technologies.

What is Open Banking?

What is Open Banking – just another buzzword or here to stay? According to Accenture’s Open Banking survey, 66% of bank executives believe that Open Banking will help create new revenue streams for their organisation. The question is – what exactly is Open Banking?

Definition of Open Banking

Open Banking is a series of regulations called for by the Competitions and Market Authority (CMA) that make it necessary for banks to share their consumers’ financial information with third-party providers (TPPs) – budgeting apps for example. On the other hand, the data that is shared includes spending habits, regular payments and the companies consumers purchase from.

Most people often confuse Open Banking as similar to PSD2. This is not necessarily accurate. Open Banking as a mandate is UK-based whereas PSD2 is the European version. Open Banking affects all UK-regulated banks, which include HSBC, Barclays, Santander, RBS, Bank of Ireland, Allied Irish Bank, Danske, Lloyds and Nationwide.

Is Open Banking safe?

With new privacy regulations recently implemented – GDPR for example – the topic of consumer information can be a fairly sensitive one. Thus, it is unsurprising that many concerns revolving around Open Banking involve issues of security.

Rest assured, however, as Open Banking does not necessitate that financial institutions and TPPs are granted instant access to your financial data. Open Banking works on the premise that TPPs are only allowed permission to consumers’ information provided that said consumers authorise it.

From a customer perspective, Open Banking effectively increases your security. This is because, the concept of consumers allowing TPPs access to their bank accounts is not actually a new one. However, Open Banking ensures that they are protected when they do.

In fact, Open Banking actually aims to provide consumers with more ownership over their financial data. It also goes without saying that Open Banking is not a binding contract. Consumers are allowed to withdraw their authorisation at any time they wish.

Why is Open Banking necessary?

Prior to Open Banking and the rise of FinTechs, financial institutions possessed troves of consumer information that they failed to extract much value from. The 2008 financial crisis was a result of the banking concentration issue which was effectively detrimental to systematic risk and product innovation.

Thus, the Open Banking regulation was conceptualised to introduce competition within the financial industry. It also opens up an opportunity for banks to deepen relationships with their consumers whilst creating more avenues for conversations regarding money management and spending choice.

How would a bank implement Open Banking?

In order to succinctly answer this question, let’s talk about a DBS case study.

DBS Bank is a Singaporean multinational banking and financial services corporation. In 2017, they launched the world’s largest API portal for banking which has boosted their ability to create innovative and customer-centric experiences.

For example, said API portal allows for PropertyGuru – Asia’s leading online property group – to easily plug into. Thus, property seekers that bank with DBS now have real-time access to their home loan affordability. This makes their search process extremely effective.

How this works is, API (also known as Application Programming Interface) refers to a set of protocols that allow two applications to talk to each other. The three types of APIs known are public, partner and internal. Under the framework of Open Banking, banks open up their internal APIs, allowing third parties to access financial information needed to develop new apps and services.

Alternative methods include Tink, a Swedish startup that provides platforms to financial institutions. Thus, banks also have the option of leveraging a public platform instead.

What are the benefits of implementing Open Banking?

The Open Banking regulation is nothing to fear. In fact, implementing Open Banking has the potential to bring an array of benefits to financial institutions.

For example, WeBank is China’s first privately-owned online-only bank, launched by Tencent in 2015. WeBank utilises WeChat’s expansive access to customer data, effectively analysing users’ activities, preferences, spending habits and financial transactions. This helps them to select the most creditworthy customers and offer them personalised financial products as well as short-term loans.

Without Open Banking, this would not be possible. By leveraging access to consumer information, Open Banking increases a bank’s capacity for personalisation whilst keeping a cost balance.

Further, by engaging in strategic partnerships, banks are able to harness the potential of Open Banking into positioning themselves as technology companies and lifestyle partners for their consumers. Imagine a banking app that dominates the daily lives of consumers – beyond monetary matters. One that allows consumers to seamlessly check their finances, apply for microloans and purchase things online.

Undoubtedly, this will be a game changer in the financial industry. The question is – to what extent?

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