Over the past few years, the term Open Banking has taken the banking industry by storm. Open Banking is the idea that consumers have the right to access the financial data their institutions have about them, and choose what third parties they’d like to share it obtain highly personalized products and services. In turn, financial institutions are responsible for providing consumers access to their account information and ensuring its availability.
The first implementation of Open Banking in-market happened in the United Kingdom in 2018 following CMA’s Order and the European Union’s Revised Payment Services Directive (PSD2).
The implementation required extensive planning and was met with a number of regulatory and technical delays, but its impact in the U.K. serves as the leading model of what to expect in other regions across the world as they too implement their own Open Banking frameworks.
The Open Banking Standard
While there is no single global Open Banking defining standard, the European Union’s PSD2 is the closest thing to one since it’s the first of its kind ; it is a legal directive with required elements for the implementing standards. PSD2 is the revised version of a directive established in the EU in 2007. The Payment Service Directive was written to mandate safer and more efficient cross-border payment services.
PSD2, implemented in 2018, takes it a step further, considering modern technological advancement, and including permission requirements for data accessed by third-party apps to increase consumer protections and rights. The United Kingdom’s Payment Services Regulation conforms with PS2D guidelines, and in effect is the first implementation of Open Banking in-market.
But what is Open Banking? In practice, open banking allows consumers to give third parties access to their transactional payment account data from financial institutions. By using application programming interfaces (APIs), account information and data can be networked across multiple channels, helping consumers share their data with multiple third parties with ease.
APIs are the mechanism that enable financial service providers to implement Open Banking, and must follow a set of technical implementation standards to protect consumer privacy and accessibility to their data.
What Are Open Banking Implementation Standards?
The Regulatory Technical Standards (RTS) were drafted so all PSD2 implementations follow the same set of guidelines for the security of consumer’s financial information.
Under the RTS, how consumers give their permission to banks and third party parties to access their financial data is also further defined for Strong Customer Authentication (SCA). Instead of requiring consumers to share their credentials (name, email, phone), they can now give their permission directly to their financial institutions by logging in in to a familiar online banking experience.
Just like Open Banking initiatives vary by country, so do their technical standards and how they’re created.
What’s the Difference Between PSD2 and Open Banking?
It’s with PSD2’s structure that U.K. Open Banking is able to give consumers broad access to their payment account information while also encouraging innovation across FinTech, banking and other financial industries.
Other financial data like retirement or investment accounts are left out of PSD2’s scope, but Envestnet | Yodlee is helping to bridge the gap and enable financial institutions with the requirements they’ll need to further improve consumer choice and security of more of their financial data through Open Finance.
Open Finance broadens the type of financial data consumers can choose to share with third party institutions, and will further drive consumer choice to reach their financial goals.
How Does Open Banking Work?
In order to enable Open Banking, a financial institution must adhere to a set of guidelines to safely give consumer’s access to their payment account information so it can be shared with third party institutions. In the U.K., only the nine major banks, Lloyds, Barclays, Nationwide, RBS, Santander, Danske Bank, HSBC, Allied Irish Banks and Bank of Ireland, were required to enable open banking by the 2018 Payment Services Regulation deadline, but now all institutions that offer payment accounts must participate.
What Does Open Banking Mean for Banks?
Open Banking compliance not only encourages innovation across the FinTech industry, but it also serves as a disrupter for the oldest and largest banks. By giving consumers access to their own financial data, they’re empowered to make their own choices of financial service providers and better decisions, allowing for increased competition.
Legacy banks are now faced with challengers who are building data driven, personalized banking experiences that align with consumers lifestyles and values, but these institutions are in a position to do the same with their existing customer bases. Envestnet | Yodlee partners with financial institutions looking for safe, responsible, and innovative solutions to compete in this new connected ecosystem that not only satisfy Open Banking compliance requirements, but bank-grade risk management as well. Such partnerships with FinTech companies are vital for some banks who risk falling behind if they do not adapt their offerings to consumers.
What Are The Benefits of Open Banking?
When Open Banking was established, it was with the consumer and industry in mind. The Competition and Markets Authority (CMA) wanted to create more fairness and choice for consumers in the market by opening banking services to third-party apps and developers. This does double duty, by also providing opportunity for innovation from FinTech companies and other financial service providers.
While Open Banking has disrupted the industry and leveled the playing field for old and new financial services providers, it has created a symmetric level of consumer protection so all parties can compete on the value of their proposition and not on consumer safety.
Open Banking benefits:
- More choices for consumer
- Streamlined payment services
- Personalized, centralized and increased services
- Greater flexibility
- Opportunity for innovation
Is Open Banking Safe?
Much like for those who monitor their bank account balances or check on the status of a credit card online or via mobile, Open Banking uses a similar infrastructure. There is a strict framework involved when sharing tokenized access with APIs before screen scraping of login and other secure data can be used . A user determines how and when their information can be shared or used, which ensures access can be granted or denied at will.
Users’ decisions are made in two ways. One by giving consent to the receiver of their data, so perhaps a third party app with personalized budgeting tools and recommendations, and by giving consent to the provider of the data, or the users’ own bank. Giving permission to both parties helps ensure user consent is understood and aligned with the intention of the consumer is sharing their data.
Open Banking Examples & Use Cases
The potential for Open Banking spans the entire financial industry. Because APIs can share consumer data with third-party apps, the implications for FinTech to explore the opportunities is endless. From developing new hyper personalised user experiences to access to a new provider, the consumer will benefit greatly from the choice of services increased competition brings. Some examples of open banking in practice:
- Lending: Loan officers and lenders can access consumer data to streamline the lending process, with less legwork falling on the consumer.
- Accounting: Businesses and individuals can link various accounts, automating the accounting process by recording payments in real time.
- Payment services: By allowing non-banks to initiate payments on a consumer’s behalf, there will be more companies like Venmo and Paypal on the market.
- Financial counseling: Apps that educate on financial literacy and credit repair can get a full scope of a consumer’s financial decisions and make suggestions on how to remedy issues.
- Fraud detection: Monitoring payments and credits can be authorized by a third party, to catch threats more quickly.
View more open banking examples we’re excited about.
The Future of Open Banking
There are several moving parts happening at once around the world when it comes to the future of Open Banking.
Open Banking in the U.K.
Open Banking is in full swing and being leveraged to launch the financial industry forward. With further refinement of APIs that enable the secure transfer of consumer financial data, and removing the need for consumers to entrust their credentials to a third party through Oauth systems, banking in the U.K. continues to transform.
Using Open Banking frameworks, the U.K. is in line to revolutionize the energy market next by exploring Open Energy.
Open Banking in Australia
The second implementation of Open Banking happened in Australia in 2020 following the Consumer Data Right (CDR) that shares a similar regulatory framework to that of the U.K.’s. Under the CDR, consumers have more control over their financial data and who they wish to share it with, and can only share it with financial institutions that qualify as data recipients.
Envestnet | Yodlee is authorized as a data recipient and already partnering with financial institutions to help consumers reach their financial goals.
Following the implementation of Open Banking, Australia is looking to implement Open Energy followed by Open Telecommunications.
Open Banking in U.S.
Development of APIs is already occurring between banks and developers in the U.S. as the country takes an industry driven approach to implementing Open Banking.
Envestnet | Yodlee is a leading player in the standardization of API development and standardization of OAuth structures already seen in the U.K. With industry taking the lead in implementation, the role of government in open banking continues to be debated.
As other regions continue to transform the banking industry as we know it, the effect for consumers remains their increased control over their own financial data to reach their financial goals with whatever products and services they choose.
Laying the groundwork that empowers them to do so is at the core of Envestnet | Yodlee’s mission as a FinTech partner to financial institutions.