Open banking is changing the face of personal finance

It has adorned the side of taxis and buses and has no doubt featured in many pitch decks from start-ups seeking to raise venture funding.

Many of us may have used it without even knowing it, let alone being able to explain how it works or how it came to be the potential infrastructure upon which we might build the future of our personal financial ecosystems.

In this article, we take a brief tour through the origins of open banking in the UK, its evolving use, cases and how it is changing the way we interact with our finances.

What is open banking?

We could fill this whole publication with the many ways that open banking could be explained but, at its core, open banking involves the granting of access to your bank account to a third-party through the use of application programming interfaces, or APIs for short.

With your consent, that third-party can then access the financial data within that account and, in some instances, instruct the bank maintaining the account to execute payment transactions. 

What is the history of open banking?

The UK has led the way internationally in the development of open banking and has been a significant early adopter.

The Open Banking Implementation Entity, the entity tasked with implementing central standards and industry guidelines for the development of the APIs required to support open banking, was founded in 2016.

In 2017 the UK’s Competition and Markets Authority made an order requiring the nine largest UK banks and building societies to open up their current accounts and work to implement common API standards for facilitating that access. 

While the CMA’s actions kick-started open banking, it was the revised payment services directive, or PSD2 as it is commonly known, that acted as a catalyst for its expansion.

PSD2, which in January 2018 was implemented into English law through the payment services regulations (PSRs), provided a legal obligation for all account servicing payment service providers to supply regulated third-party providers with access online payment accounts they maintain.

Provided certain conditions are satisfied, the account servicing payment service providers must grant access where requested, and may only reject those access requests in certain circumstances.

The provision of open banking is not simply confined to the B2C market.

The PSRs also created two new payment services that would capture the third-party providers accessing accounts: account information services and payment initiation services.

Account information service providers can access the data in your bank accounts and use it in a variety of ways, but they cannot give instructions with respect to payment transactions on those accounts.

Accordingly, the regulatory regime imposed on account information service providers is lighter than for other payment institutions.

Payment initiative services providers are able to provide a form of software bridge that facilitates push payments between accounts without the use of a traditional payment instrument, like a debit card.

In both cases, the third-party providers do not ever come into possession of funds credited to your accounts.

Open banking in practice

The implementation of PSRs and the creation of a regulatory avenue for broader third-party access to payment accounts has caused a material expansion in open banking offerings as the industry uses the technology to bring new products and services to market.

Payment initiation services providers have positioned themselves as an alternative to using payment cards when making payments at the point of sale, and their technology is beginning to feature more prominently within the e-commerce journeys of merchants.

Given the fees charged in connection with payment card transactions and the payout mechanics of merchant acquirers, direct account-to-account transfers with little or no fees and immediate settlement have proven an increasingly attractive option to merchants. 

The provision of account information services has also grown significantly, with the Financial Conduct Authority acknowledging that these offerings have expanded beyond even what they had expected.

There are the obvious examples of account aggregation apps which allow you to display data from all of your various accounts in one mobile application, but other models have sprung up around this.

The ultimate end goal is the creation of our own personal financial ecosystems that we tailor, enhance and manage seamlessly.

Applications such as Moneybox and Lumio access your accounts and facilitate investment opportunities on expenditure and unused funds, while others are conducting comprehensive analysis on spending patterns and showing users where their money goes each month. 

Credit reference agencies have been using open banking to access accounts and undertake more specific underwriting and affordability assessments based on an applicant’s actual incomings and outgoings on their accounts, while others have been using access to accounts to facilitate switching of financial services products.

The provision of open banking is not simply confined to the B2C market, and a number of offerings have sprung up in recent years looking to support businesses with managing their own financial affairs.

These offerings try to create an easier way to manage cash flow and treasury functions, facilitate more seamless payments of invoices, allow businesses to track expenses across their various accounts and better manage their financial health.

What of the future?

Many of the innovations and examples of offerings in this article go beyond the initial vision for open banking and stretch into what is being called 'open finance', which is based on the fundamental principle that the data that is supplied by and created on behalf of users of financial services and products should be owned and controlled by those customers, and not just the financial institutions that serve them. 

In this sense, open finance leverages the work that has already been undertaken by open banking to break down barriers between the financial services and products that we interact with, giving us greater visibility and optionality to interact with those services and products. 

The ultimate end goal is the creation of our own personal financial ecosystems that we tailor, enhance and manage seamlessly, made possible by the technological enhancements that open banking established. In many ways, open banking is just the start.

Albert Weatherill is a counsel at Norton Rose Fulbright